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The Effect of State Antitakeover Laws on the Firm's Bondholders


Bill B. Francis


University of South Florida - College of Business Administration

Iftekhar Hasan


Fordham University; Bank of Finland

Kose John


New York University (NYU) - Department of Finance

Maya Waisman


Fordham University Schools of Business

January 1, 2009

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We examine how state antitakeover laws affect bondholders and the cost of debt, and report four findings. First, bonds issued by firms incorporated in takeover friendly states have significantly higher at-issue yield spreads than bonds issued by firms in states with restrictive antitakeover laws. Second, firms in takeover friendly states have significantly higher leverage than their counterparts in restrictive law states. Third, bond issues are associated with negative average stock price reactions among firms in takeover friendly states, but positive stock price reactions among firms in restrictive law states. And fourth, existing bond values increase, on average, upon the introduction of Business Combination antitakeover law. These results indicate that state antitakeover laws tend to decrease bond yields and increase bond values – the opposite of their effect on equity values. This, in turn, implies that state laws help mitigate the agency cost of debt by shielding bondholders from expropriation in takeovers. Overall, the empirical evidence suggests that the effect of antitakeover provisions on firm value must take into account the impacts of both bondholders and stockholders.

Number of Pages in PDF File: 58

Keywords: State antitakeover laws, cost of debt capital, agency cost

JEL Classification: G32, G34

working papers series





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Date posted: March 23, 2006 ; Last revised: March 16, 2010

Suggested Citation

Francis, Bill B. and Hasan, Iftekhar and John, Kose and Waisman, Maya, The Effect of State Antitakeover Laws on the Firm's Bondholders (January 1, 2009). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=890870 or http://dx.doi.org/10.2139/ssrn.890870

Contact Information

Bill B. Francis
University of South Florida - College of Business Administration ( email )
4202 E. Fowler Avenue, BSN 3403
Dept. of Finance
Tampa, FL 33620-5500
United States
813-974-6300 (Phone)
813-974-3030 (Fax)
HOME PAGE: http://www.coba.usf.edu/departments/finance/facult
Iftekhar Hasan
Fordham University ( email )
113 West 60th Street
New York, NY 10023
United States
Bank of Finland ( email )
P.O. Box 160
Helsinki 00101
Finland
Kose John
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)
Maya Waisman (Contact Author)
Fordham University Schools of Business ( email )
113 West 60th Street
Bronx, NY 10458
United States

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