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The Value of Creditor Control in Corporate Bonds

62 Pages Posted: 7 Mar 2014 Last revised: 1 Jun 2016

Peter Feldhütter

London Business School

Edith S. Hotchkiss

Boston College - Carroll School of Management

Oğuzhan Karakaş

Cambridge Judge Business School - Department of Finance & Accounting

Date Written: September 7, 2015

Abstract

This paper introduces a measure that captures the premium in bond prices that is due to the value of creditor control. We estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using CDS contracts. Empirically, we find this premium increases as firm credit quality decreases and around important credit events such as defaults, bankruptcies, and covenant violations; the increase is greatest for bonds most pivotal to changes in control. Changes in bond and CDS liquidity do not appear to drive increases in the premium.

Keywords: Creditor control, Credit default swap (CDS), Distress, Default, Bankruptcy, Covenant violation, Liquidity, Corporate bonds

JEL Classification: G13, G33, G34

Suggested Citation

Feldhütter, Peter and Hotchkiss, Edith S. and Karakaş, Oğuzhan, The Value of Creditor Control in Corporate Bonds (September 7, 2015). Journal of Financial Economics (JFE), Volume 121, Issue 1, pp. 1-27, July 2016. Available at SSRN: https://ssrn.com/abstract=2405036 or http://dx.doi.org/10.2139/ssrn.2405036

Peter Feldhütter (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Edith S. Hotchkiss

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Department of Finance Fulton Hall, Room 330
Chestnut Hill, MA 02467
United States
617-552-3240 (Phone)
617-552-0431 (Fax)

Oğuzhan Karakaş

Cambridge Judge Business School - Department of Finance & Accounting ( email )

University of Cambridge
Trumpington St.
Cambridge, CB2 1AG
United Kingdom

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