How Does Shareholder Governance Affect the Cost of Borrowing? Evidence from the Passage of Anti-Takeover Provisions

Abstract

This paper examines the effect of shareholder governance on firms' cost of borrowing using the voting outcomes of shareholder-sponsored anti-takeover governance proposals. Implementing a regression discontinuity design centered around the proposals' passing thresholds, we show that firms' public debt prices fall significantly upon the proposals' passage, and that banks demand higher interest rates and more general covenants on new loans issued to those firms. We find that these effects are more pronounced for riskier firms where shareholder-debtholder conflicts are more severe. Moreover, firms with passed shareholder-sponsored proposals become more volatile, reflecting an increase in their risk-shifting incentives. Collectively, our findings suggest that shareholder governance exacerbates shareholder-debtholder conflicts and raises firms' cost of borrowing.

Keywords: Shareholder Governance, Public Debt, Private Debt, Voting, Regression Discontinuity

JEL Classification: G14, G21, G32, G34