Governance Mechanisms and Bond Prices

Posted: 25 Jun 2008

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Vinay B. Nair

University of Pennsylvania - Finance Department

Date Written: 2007

Abstract

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from) takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance, and bondholder interests diverge.

Keywords: G12, G34

Suggested Citation

Cremers, K. J. Martijn and Nair, Vinay B., Governance Mechanisms and Bond Prices (2007). The Review of Financial Studies, Vol. 20, Issue 5, pp. 1359-1388, 2007. Available at SSRN: https://ssrn.com/abstract=1151157 or http://dx.doi.org/10.1093/rfs/hhm006

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Vinay B. Nair

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
732
PlumX Metrics