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

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