How Does Shareholder Governance Affect the Cost of Borrowing?

Abstract

This paper examines the effect of shareholder governance on firms' cost of borrowing. Using voting results on shareholder-sponsored governance proposals, we find significant and negative reactions in the public debt and secondary loan markets to the passage of governance proposals. Banks also demand higher interest rates and more general covenants after the passage of these proposals. The effects are more pronounced for ex ante risky firms. Moreover, firms with proposals passed become more volatile, indicating an increase in risk-shifting incentives of the firms. Collectively, our findings suggest that shareholder governance can exacerbate shareholder-debtholder conflicts and raise firms' costs of borrowing.

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

JEL Classification: G14, G21, G32, G34