Delegated Monitoring: The Effectiveness and Pricing of Bond Indenture Trustees

37 Pages Posted: 20 Mar 2012  

Christian Andres

WHU - Otto Beisheim School of Management

André Betzer

BUW- Schumpeter School of Business and Economics

Peter Limbach

University of Cologne and Centre for Financial Research (CFR)

Date Written: February 26, 2012

Abstract

To highlight the value of delegated monitoring through bond trustees, we examine the high-yield corporate bond market where default risk is high, covenants are numerous, and market values are particularly sensitive to wealth transfers. We show that bond trustees that also act as underwriters in the low-grade bond segment, but not the market’s largest trustees, reduce firms’ at-issue bond yields by 33 to 40 basis points. Accordingly, we report significantly lower bond default and downgrade risks associated with superior monitoring by these trustees. These pricing effects remain when we control for self-selection and do not hinge on whether we solely consider trustee identity or interaction terms of trustees with covenant variables that measure necessary monitoring effort. Our results can be interpreted as evidence for informational and reputational spillover effects of banks providing several services in the high-yield market segment.

Keywords: bond trustees, borrowing costs, covenants, default risk, delegated monitoring, information and reputation spillover, self-selection, skin in the game

JEL Classification: G21, G24, G30

Suggested Citation

Andres, Christian and Betzer, André and Limbach, Peter, Delegated Monitoring: The Effectiveness and Pricing of Bond Indenture Trustees (February 26, 2012). Available at SSRN: https://ssrn.com/abstract=2024556 or http://dx.doi.org/10.2139/ssrn.2024556

Christian Andres (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

André Betzer

BUW- Schumpeter School of Business and Economics ( email )

Gaußstraße 20
Wuppertal
Germany

HOME PAGE: http://finance.uni-wuppertal.de/index.php?id=1153

Peter Limbach

University of Cologne and Centre for Financial Research (CFR) ( email )

Albertus-Magnus-Platz
Köln, 50923
Germany

HOME PAGE: http://www.finance.uni-koeln.de

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