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Governance Mechanisms and Bond Prices

56 Pages Posted: 12 Oct 2004  

Martijn Cremers

University of Notre Dame

Vinay B. Nair

University of Pennsylvania - Finance Department

Chenyang (Jason) Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: October 2006

Abstract

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from)takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance and bondholder interests diverge.

Keywords: corporate governance, takeovers, shareholder controls

Suggested Citation

Cremers, Martijn and Nair, Vinay B. and Wei, Chenyang (Jason), Governance Mechanisms and Bond Prices (October 2006). Yale ICF Working Paper No. 06-30; NYU, Law and Economics Research Paper No. 04-007; 7th Annual Texas Finance Festival Paper. Available at SSRN: https://ssrn.com/abstract=516564 or http://dx.doi.org/10.2139/ssrn.516564

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Vinay B. Nair (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)

Chenyang Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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