Governance Effects of Corporate Bond Market Microstructure

Abstract

I investigate whether trading frictions in the secondary corporate bond market affect firms’ real decisions. I find that public availability of bond prices leads to a significant reduction in shareholder payout, consistent with the notion that bondholders employ the trading process to discipline managerial actions that expropriate bondholders’ wealth. The treatment effect is more pronounced when the threat of a coordinated sell-off is greater, bondholders’ demand for monitoring-relevant information is higher, and the payout covenant is more likely to bind. Treatment firms also increase cash holdings, preserve greater balance sheet liquidity, and reduce acquisition investment. Finally, treatment firms experience improved credit ratings and incur lower borrowing cost for primary market bond issues. The findings suggest that bondholders can influence firms’ real decisions through the trading process.

Keywords: Dissemination, Transparency, TRACE, Shareholder Payout, Bondholder Rights, Wealth Expropriation, Agency Cost of Debt, Bondholder Governance, Monitoring, Voice and Exit

JEL Classification: G35, G38, G34, G32