Is It Worthwhile to Augment the Legal Protection of Public Debt Placed by Privately Held Companies?

Abstract

We examine the effects of a law amendment in Israel in 2011 that imposes a set of minimum corporate governance standards on privately held firms that issue publicly traded bonds. Two main results emerge. First, consistent with US evidence, the improved bondholder protection boosts the immediate market valuation of private firms' bonds. Second, the amendment suppresses the private bonds market. After the amendment enactment, the number of private bond IPOs decreases sharply, and an extraordinary proportion of private firms redeem their existing public bonds early. However, given that the exiting firms had more related party transactions, it can be argued that the amendment increases market quality.

Keywords: Debt of privately held companies; corporate governance improvements; Regulatory reforms in bond markets

JEL Classification: G32; G34; G38