The Impact of Stronger Shareholder Control on Bondholders

Abstract

We study the impact of stronger shareholder control on bondholders. We find that the passage of a shareholder-sponsored governance proposal leads to a decline in CDS spreads, indicating a net positive effect on bondholders. Increasing shareholder control mitigates managerial entrenchment, which provides gains to bondholders that are larger than the negative impact that increased shareholder control has on shareholder-bondholder conflicts. Results are stronger for firms with existing high levels of shareholder-bondholder conflict, and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting concerns. Stronger shareholder control leads to an improvement in credit ratings and operating performance in the long-term.

Keywords: Corporate Governance, Debt, Agency Cost, Shareholder Meetings, Regression Discontinuity, Event Studies

JEL Classification: G34, G32, G14