Insider Ownership, Governance Mechanisms, and Corporate Bond Pricing Around the World

52 Pages Posted: 24 Aug 2019

See all articles by Rob Bauer

Rob Bauer

Maastricht University; European Centre for Corporate Engagement (ECCE)

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement; Maastricht University - Department of Finance; Utrecht University - School of Economics

Nora M. C. Pankratz

Board of Governors of the Federal Reserve System

Date Written: December 12, 2018

Abstract

We investigate the effect of insider ownership on corporate bond yield spreads from 2003 to 2014 using a sample of 10,470 bonds issued by 1,222 non-financial firms from 48 countries. We find that greater insider ownership is associated with higher yield spreads. This positive relationship holds after controlling for measures of risk-taking, which suggests that bondholders price-protect against greater insider ownership for reasons beyond insiders’ heightened incentives to take risk. We consider consumption of private benefits as another economic channel through which insider ownership hurts bondholders. Using a global index of shareholder rights, we show that the positive association between insider ownership and the spread decreases for firms with relatively stronger shareholder rights, in which consumption of private benefits is less likely to occur. Furthermore, we present evidence that the probability of tunnelling, through related-party transactions, is larger in firms with more insider ownership. The positive relation between insider ownership holds even after excluding firms that deviate from the one-share-one-vote principle and firms with cross-ownership. We conclude that bondholders anticipate that greater insider ownership facilitates consumption of private benefits, with implications for the valuation of corporate debt around the world.

Keywords: Corporate Bonds, Insider Ownership, Tunnelling

JEL Classification: G32, G34

Suggested Citation

Bauer, Rob and Derwall, Jeroen and Derwall, Jeroen and Pankratz, Nora M. C., Insider Ownership, Governance Mechanisms, and Corporate Bond Pricing Around the World (December 12, 2018). Available at SSRN: https://ssrn.com/abstract=3300200 or http://dx.doi.org/10.2139/ssrn.3300200

Rob Bauer

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 3883871 (Phone)

European Centre for Corporate Engagement (ECCE) ( email )

Tongersestraat 53
Maastricht, 6211LM
Netherlands

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.corporate-engagement.com/

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.fdewb.unimaas.nl/finance/?page=member&id=175

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Nora M. C. Pankratz (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
100
Abstract Views
757
Rank
472,765
PlumX Metrics