Abstract

http://ssrn.com/abstract=892808
 
 

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Creditor Protection Laws and the Cost of Debt


Sattar Mansi


Virginia Polytechnic Institute & State University

William F. Maxwell


SMU - Cox School

John K. Wald


University of Texas at San Antonio

February 19, 2007

1st Annual Conference on Empirical Legal Studies Paper
Journal of Law and Economics, Forthcoming

Abstract:     
We examine the impact of state payout restrictions on firm credit ratings and bond yields. Using publicly traded bond data for a sample of large firms, we find that firms incorporated in states with more restrictive payout statutes (e.g., New York and California), have better credit ratings and significantly lower yield spreads (about 8.7%) relative to firms incorporated in less restrictive states (e.g., Delaware). These results suggest that incorporation in a more restrictive state provides a credible commitment mechanism for avoiding some of the moral hazard problems associated with long-term debt. This commitment corresponds to an economically and statistically significant difference in market yields and firm financing costs and is robust to controls for ownership, governance, debt type, Delaware versus non-Delaware incorporation, and covenant usage. Overall, our results are consistent with the notion that Delaware incorporation has hidden costs for some firms.

Number of Pages in PDF File: 33

Keywords: state payout restrictions, antitakeover provisions, agency cost, corporate governance

JEL Classification: G32, G34

working papers series





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Date posted: March 22, 2006 ; Last revised: March 24, 2009

Suggested Citation

Mansi, Sattar and Maxwell, William F. and Wald, John K., Creditor Protection Laws and the Cost of Debt (February 19, 2007). 1st Annual Conference on Empirical Legal Studies Paper; Journal of Law and Economics, Forthcoming. Available at SSRN: http://ssrn.com/abstract=892808 or http://dx.doi.org/10.2139/ssrn.892808

Contact Information

Sattar Mansi (Contact Author)
Virginia Polytechnic Institute & State University ( email )
William F. Maxwell
SMU - Cox School ( email )
Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States
John K. Wald
University of Texas at San Antonio ( email )
1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)
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