The Impact of Shareholder Control on Bondholders

45 Pages Posted: 5 Nov 2008

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame; ECGI

Vinay B. Nair

University of Pennsylvania - Finance Department

Chenyang (Jason) Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: March 2004

Abstract

This paper investigates the effect of shareholder control on bondholder wealth. While stronger shareholder control can benefit bondholders by disciplining managers, it also increases the likelihood of events that can hurt bondholders, e.g. hostile takeovers. We hypothesize that shareholder control can have contrasting effects on bond yields depending on the takeover vulnerability of a firm. Using the presence of an institutional blockholder to proxy for shareholder control and firm-level anti-takeover provisions to proxy for takeover vulnerability, we find that shareholder control is associated with lower yields if the firm is protected from takeovers. We also find that shareholder control is associated with higher yields if the firm is exposed to takeovers. The contrasting effects of shareholder control on yields are the strongest for firms that are small and have low leverage. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 93 basis points. Further, the results are insignificant for a sub-sample of firms where the bondholders are protected from takeovers through the poison put covenant. Bond ratings also appear to incorporate a similar effect of shareholder control on bondholders Finally, we find that a bond pricing model that does not account for shareholder control generates an annualized abnormal return of 1% to 1.4% for portfolios that long firms with both strong shareholder control and high takeover vulnerability and short firms without either shareholder control or takeover vulnerability. Combined, these results suggest that the use of different governance mechanisms, such as shareholder monitoring and takeover vulnerability, depends on a firm s capital structure and that bond-pricing models should account for shareholder control.

Suggested Citation

Cremers, K. J. Martijn and Nair, Vinay B. and Wei, Chenyang, The Impact of Shareholder Control on Bondholders (March 2004). NYU Working Paper No. S-CDM-04-06, Available at SSRN: https://ssrn.com/abstract=1295782

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

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

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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)

Chenyang Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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