Hostname: page-component-6bf8c574d5-rwnhh Total loading time: 0 Render date: 2025-02-16T19:51:07.407Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Corporate Governance Matter to Bondholders?

Published online by Cambridge University Press:  06 April 2009

Mark S. Klock ,
Sattar A. Mansi  and
William F. Maxwell
Mark S. Klock
Affiliation:
[email protected], School of Business, George Washington University, 2020 G Street, NW, Washington, DC 20052
Sattar A. Mansi
Affiliation:
[email protected], Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061
William F. Maxwell
Affiliation:
[email protected], Eller College of Business, University of Arizona, Tucson, AZ 85721.
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990–2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with the strongest management rights (strongest antitakeover provisions) and firms with the strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about 34 basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 4 , December 2005 , pp. 693 - 719
Copyright
Copyright © School of Business Administration, University of Washington 2005

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Agrawal, A., and Jaffe, J.. “Do Takeover Targets Underperform? Evidence from Operating and Stock Returns.” Journal of Financial and Quantitative Analysis, 38 (2003), 721–746.CrossRefGoogle Scholar
Almazan, A., and Suarez, J.. “Entrenchment and Severance Pay in Optimal Governance Structures.” Journal of Finance, 58 (2003), 519–548.CrossRefGoogle Scholar
Altman, E. “Financial Ratio, Discriminant Analysis, and the Prediction of Corporate Bankruptcy.” Journal of Finance, 23 (1968), 589–609.CrossRefGoogle Scholar
Amihud, Y., and Lev, B.. “Risk Reduction as a Managerial Motive for Conglomerate Mergers.” Rand Journal of Economics, 12 (1981), 605–618.Google Scholar
Anderson, R.; Mansi, S..; and Reeb, D.. “Founding Family Ownership and the Agency Costs of Debt.” Journal of Financial Economics, 68 (2003), 263–285.CrossRefGoogle Scholar
Asquith, P., and Wizman, T..“ Event Risk, Covenants, and Bondholder Returns in Leveraged Buyouts.” Journal of Financial Economics, 27 (1990), 195–213.CrossRefGoogle Scholar
Beim, D.“Estimating Bond Liquidity. Working Paper, Columbia Univ. (1992).Google Scholar
Bhagat, S., and Jefferis, R.. “The Econometrics of Corporate Governance Studies.“ Cambridge, MA: The MIT Press (2002).CrossRefGoogle Scholar
Bhagat, S., and Romano, R.. “Event Studies and the Law: Part II, Empirical Studies of Corporate Law.” American Law and Economics Review, 4 (2001), 380–423.CrossRefGoogle Scholar
Bhojraj, S., and Sengupta, P.. “Effects of Corporate Governance on Bond Ratings and Yields: The Role of Institutional Investors and Outside Directors.” Journal of Business, 76 (2003), 455–475.CrossRefGoogle Scholar
Billett, M. “Targeting Capital Structure: The Relationship between Risky Debt and the Firm's Likelihood of being Acquired.” Journal of Business, 69 (1996), 173–192.CrossRefGoogle Scholar
Billett, M.; King, D.; and Mauer, D.. “Bondholders Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s.” Journal of Finance, 59 (2004), 107–135.CrossRefGoogle Scholar
Black, B.; Jang, H.; and Kim, W.. “Does Corporate Governance Affect Firm Value? Evidence from Korea.” Working Paper, KDI School of Public Policy and Management (2003).Google Scholar
Brickley, J.; Lease, R.; and Smith, C.. “Ownership Structure and Voting on Antitakeover Amendments.” Journal of Financial Economics, 20 (1988), 267–291.CrossRefGoogle Scholar
Chen, N.; Roll, R.; and Ross, S.. “Economic Forces and the Stock Market. Journal of Business, 59 (1986), 383–403.CrossRefGoogle Scholar
Coles, J.; Meschke, J.; and Lemmon, M.. “Structural Models and Endogeneity in Corporate Finance.” Working Paper, Arizona State Univ. (2003).Google Scholar
Comment, R., and Schwert, G.. “Poison or Placebo? Evidence on the Deterrence and Wealth Effects of Modern Antitakeover Measures.” Journal of Financial Economics, 39 (1995), 3–43.CrossRefGoogle Scholar
Cook, D., and Easterwood, J.. “Poison Put Bonds: An Analysis of their Economic Role.” Journal of Finance, 49 (1994), 1905–1920.CrossRefGoogle Scholar
Core, J.; Holthausen, R.; and Larcker, D.. “Corporate Governance, Chief Executive Office Compensation, and Firm Performance.” Journal of Financial Economics, 51 (1999), 371–406.CrossRefGoogle Scholar
Crabbe, L. “Event Risk: An Analysis of Losses to Bondholders and ‘Super Poison Put’ Bond Covenants.” Journal of Finance, 46 (1991), 689–706.Google Scholar
Cremers, M., and Nair, V.. “Governance Mechanisms and Equity Prices.” Journal of Finance (forthcoming (2005)).CrossRefGoogle Scholar
Cremers, M.; Nair, V.; and Wei, C.. “The Impact of Shareholder Control on Bondholders.” Working Paper, Yale School of Management (2004).CrossRefGoogle Scholar
DeAngelo, H., and Rice, E.. “Antitakeover Charter Amendments and Stockholder Wealth.” Journal of Financial Economics, 11 (1983), 329–359.CrossRefGoogle Scholar
Denis, D., and McConnell, J.. “International Corporate Governance.” Journal of Financial and Quantitative Analysis, 38 (2003), 1–36.CrossRefGoogle Scholar
Elton, E., and Gruber, M.. “Modern Portfolio Theory and Investment Analysis.” New York, NY: John Wiley & Sons (1995).Google Scholar
Elton, E.; Gruber, M.; Agrawal, D.; and Mann, C.. “Explaining the Rate Spread on Corporate Bonds.” Journal of Finance, 56 (2001), 2415–2430.CrossRefGoogle Scholar
Fabozzi, F.Bond Markets, Analysis, and Strategies. 4th ed. Upper Saddle River, NJ: Prentice Hall (2000).Google Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns of Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and MacBeth, J.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 67–105.CrossRefGoogle Scholar
Fama, E., and Miller, M.. The Theory of Finance. Hinsdale, IL: Dryden Press (1972).Google Scholar
Gillan, S.; Hartzell, J.; and Starks, L.. “Industries, Investment Opportunities, and Corporate Governance Structures.” Working Paper, Univ. of Texas (2003).Google Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Harris, E. “Antitakeover Measures, Golden Parachutes, and Target Firm Shareholder Welfare.” RAND Journal of Economics, 21 (1990), 614–625.CrossRefGoogle Scholar
Harvey, C.; Lins, K.; and Roper, A.. “The Effects of Capital Structures When Expected Agency Costs are Extreme.” Journal of Financial Economics, 74 (2004), 3–30.CrossRefGoogle Scholar
Holmstrom, B., and Kaplan, S.. “Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s.” MIT Working Paper Series 01–11 (2001).CrossRefGoogle Scholar
Jensen, M. “Agency Costs of the Free Cash Flow, Corporate Finance and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jensen, M., and Ruback, R.. “The Market for Corporate Control: The Scientific Evidence.” Journal of Financial Economics, 11 (1983), 5–50.CrossRefGoogle Scholar
Jordan, J., and Mansi, S.. “Term Structure Estimation from On-The-Run Treasuries.” Journal of Banking and Finance, 27 (2003), 1487–1509.CrossRefGoogle Scholar
Karpoff, J., and Malatesta, P.. “The Wealth Effects of Second Generation State Takeover Legislation.” Journal of Financial Economics, 25 (1989), 291–322.CrossRefGoogle Scholar
Klein, A. “Firm Performance and Board Committee Structures.” Journal of Law and Economics, 41 (1998), 275–303.CrossRefGoogle Scholar
Lehn, K., and Poulsen, A.. “Contractual Resolution of Bondholder-Stockholder Conflicts in Leveraged Buyouts.” Journal of Law and Economics, 34 (1991), 645–673.CrossRefGoogle Scholar
Linn, S., and McConnell, J.. “An Empirical Investigation of the Impact of ‘Antitakeover’ Amendments on Common Stock Prices.” Journal of Financial Economics, 11 (1983), 361–399.CrossRefGoogle Scholar
Mansi, S., and Reeb, D.. “Corporate Diversification: What Gets Discounted?” Journal of Finance, 57 (2002), 2167–2183.CrossRefGoogle Scholar
Maxwell, W., and Rao, R.. “Do Spin-Offs Expropriate Wealth from Bondholders?” Journal of Finance, 58 (2003), 2087–2108.CrossRefGoogle Scholar
Maxwell, W., and Stephens, C.. “The Wealth Effects of Repurchases on Bondholders.” Journal of Finance, 58 (2003), 895–919.CrossRefGoogle Scholar
Nelson, C., and Siegel, A.. “Parsimonious Modeling of Yield Curves.” Journal of Business, 6 (1987), 473–489.CrossRefGoogle Scholar
Newey, W., and West, K.. “A Simple, Positive-Definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Ohlson, J. “Financial Ratios and the Probabilistic Prediction of Bankruptcy.” Journal of Accounting Research, 18 (1980), 109–131.CrossRefGoogle Scholar
Parrino, R. “Spin-Offs and Wealth Transfers: The Marriott Case.” Journal of Financial Economics, 43 (1997), 241–274.CrossRefGoogle Scholar
Parrino, R., and Weisbach, M.. “Measuring Investment Distortions Arising from Stockholder-Bondholder Conflicts.” Journal of Financial Economics, 53 (1999), 3–42.CrossRefGoogle Scholar
Shleifer, A., and Summers, L.. “Breach of Trust in Hostile Takeovers.” In Corporate Takeovers: Causes and Consequences, Auerbach, A. J., ed. Chicago, IL: Univ. of Chicago Press (1988).Google Scholar
Shleifer, A., and Vishny, R.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Smith, C., and Warner, J.. “On Financial Contracting: An Analysis of Bond Covenants.” Journal of Financial Economics, 7 (1979), 117–130.CrossRefGoogle Scholar
Stein, J. “Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 61–80.CrossRefGoogle Scholar
Warga, A., and Welch, I.. “Bondholder Losses in Leveraged Buyouts.” Review of Financial Studies, 6 (1993), 959–982.CrossRefGoogle Scholar
Williams, R. “A Note on Robust Variance Estimation for Cluster-Correlated Data.” Biometrica, 56 (2002), 645–646.CrossRefGoogle Scholar
Woolridge, J.Econometric Analysis of Cross Section and Panel Data. Cambridge, MA: The MIT Press (2002).Google Scholar