Executive Stock Ownership Guidelines and Debtholder Wealth

Posted: 22 Sep 2015 Last revised: 5 Mar 2019

See all articles by Jun-Koo Kang

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University

Limin Xu

University of Adelaide - Business School

Date Written: June 20, 2018

Abstract

We examine how the adoption of executive stock ownership guidelines affects debtholder wealth. We find that guideline adoption is associated with lower loan spreads, fewer collateral requirements, and fewer other restrictive covenants. The results are robust to using an instrumental variables approach. We further find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms’ risk-taking incentives are lower. These results suggest that guideline adoption benefits debtholders by lowering agency costs of debt. However, we also find that adoption of ownership guidelines is associated with a significant increase in stock prices and that firms are more likely to increase financial reporting quality in the post-adoption period, indicating that guideline adoption incentivizes managers to improve firm fundamentals, benefiting both shareholders and debtholders.

Keywords: Stock ownership guideline, Debtholder wealth, Bank loan, Loan spread, Covenant, Endogeneity, Difference-in-differences test

JEL Classification: G21, G32, M12, M41

Suggested Citation

Kang, Jun-Koo and Xu, Limin, Executive Stock Ownership Guidelines and Debtholder Wealth (June 20, 2018). The Accounting Review Forthcoming, Available at SSRN: https://ssrn.com/abstract=2663873 or http://dx.doi.org/10.2139/ssrn.2663873

Jun-Koo Kang

Nanyang Business School, Nanyang Technological University ( email )

Nanyang Avenue, Block S3-01b-54
Singapore, 639798
Singapore
(+65) 6790-5662 (Phone)
(+65) 6791-3697 (Fax)

HOME PAGE: http://www.nbs.ntu.edu.sg/nbs_corporate/divisions/bnf/index.asp

Limin Xu (Contact Author)

University of Adelaide - Business School ( email )

10 Pulteney Street
Adelaide, South Australia 5005
Australia

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