Governance Effects of Corporate Bond Market Microstructure

51 Pages Posted: 19 Aug 2019 Last revised: 13 Dec 2019

See all articles by Mahfuz Chy

Mahfuz Chy

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Date Written: August 14, 2019

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

Suggested Citation

Chy, Mahfuz, Governance Effects of Corporate Bond Market Microstructure (August 14, 2019). Available at SSRN: https://ssrn.com/abstract=3437752 or http://dx.doi.org/10.2139/ssrn.3437752

Mahfuz Chy (Contact Author)

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

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