Is it Worthwhile to Augment the Legal Protection of Public Debt Placed by Privately Held Companies?

Abstract

We examine the effects of a law amendment in Israel in 2011 that imposes a set of minimum corporate governance standards on privately held firms that issue publicly traded bonds. Two main results emerge. First, consistent with US evidence, the improved bondholder protection boosts the immediate market valuation of private firms' bonds. Second, the amendment suppresses the private bonds' IPO market. The number of privately held firms issuing public debt for the first time decreases sharply after the amendment enactment. This unintended result of the amendment illustrates the pitfall of legal intervention.

Keywords: Debt of privately held companies, corporate governance improvements, Regulatory reforms in bond markets

JEL Classification: G32, G34, G38