RFS Advance Access originally published online on February 7, 2007
Review of Financial Studies 2007 20(5):1359-1388; doi:10.1093/revfin/hhm006
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Governance Mechanisms and Bond Prices
Yale University
University of Pennsylvania
Federal Reserve Bank of New York
Address correspondence to K.J. Martijn Cremers, Yale School of Management, International Center for Finance, Box 208200, 135 Prospect Street, New Haven, CT 06520-8200, United States, telephone: (203) 436 0649, fax: (203) 436 0630, or e-mail: martijn.cremers{at}yale.edu
JEL: G12, G34
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Abstract |
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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.
The authors wish to thank Ed Altman, Paul Gompers, Bill Green, Denis Gromb, Martin Gruber, Kose John, Steve Kaplan, Robert McDonald (the editor), Andrew Metrick, Eli Ofek, Thomas Phillipon, Matthew Richardson, Anthony Saunders, Raghu Sundaram, Robert Whitelaw, Daniel Wolfenzon, Ralph Walking, David Yermack and an anonymous referee, as well as seminar participants at Stern School of Business, Yale University, Maastricht University, Hofstra University, University of Amsterdam, Tsinghua University, Rutgers University, the NBER summer institute, the Annual Finance Symposium at the University of Maryland, the Swedish School of Economics, the American Finance Association, the second annual conference of the Caesarea Center at the IDC Herzliya and the First Annual Asset Pricing Retreat in Amsterdam for helpful comments. Nair gratefully acknowledges support from the Center of Law and Business at NYU. The paper was previously circulated under the title "The Congruence of Shareholder and Bondholder Governance".
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