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

63 Pages Posted: 16 Nov 2016 Last revised: 17 Nov 2022

See all articles by Yukun Liu

Yukun Liu

University of Rochester - Simon Business School

Xi Wu

University of California, Berkeley - Haas School of Business

Date Written: February 22, 2019

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

Suggested Citation

Liu, Yukun and Wu, Xi, How Does Shareholder Governance Affect the Cost of Borrowing? Evidence from the Passage of Anti-Takeover Provisions (February 22, 2019). Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2869446 or http://dx.doi.org/10.2139/ssrn.2869446

Yukun Liu

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Xi Wu (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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