Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry

Posted: 15 Jul 2011

See all articles by Wei Du

Wei Du

West Chester University

Maya Waisman

Fordham University - Gabelli School of Business

Haizhi Wang

Illinois Institute of Technology - Stuart School of Business

Mingming Zhou

University of Colorado, Colorado Springs - College of Business

Date Written: June 18, 2011

Abstract

Using new bond issues in the financial services industry, this study examines whether and to what extent the capital markets recognize the risk associated with the mobility of human capital. We evaluate the state-by-state variations in the enforceability of noncompetition agreements in the United States to test the market-discipline hypothesis and find a significant negative relation between the degree of enforcement of noncompetition agreements and the yield spreads for bonds issued by financial institutions. We also find that the negative relation is more prominent for investment-grade bonds and bonds with long-term maturities. In addition, we find that investors care more about managerial stability when bond issuers have weak protection of shareholder rights. Given the extreme importance of human capital in the financial services industry and the heightened turnover rate in the industry, our study sheds further light on the importance of intangible assets in shaping the perception of firm risk. Moreover, our paper also establishes another robust link between law and finance in the sense that the regulatory environment has a significant effect on the cost of debt for financial firms.

Keywords: bond issuance, managerial stability, noncompetition clauses, cost of debt

JEL Classification: G12, G24, G32

Suggested Citation

Du, Wei and Waisman, Maya and Wang, Haizhi and Zhou, Mingming, Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry (June 18, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1885752 or http://dx.doi.org/10.2139/ssrn.1885752

Wei Du

West Chester University ( email )

West Chester, PA 19383
United States

Maya Waisman

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

Haizhi Wang (Contact Author)

Illinois Institute of Technology - Stuart School of Business ( email )

Stuart Graduate School of Business
565 W. Adams St.
Chicago, IL 60661
United States

Mingming Zhou

University of Colorado, Colorado Springs - College of Business ( email )

1420 Austin Bluffs Parkway
Colorado Springs, CO 80933-7150
United States
1-719-255-5153 (Phone)

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