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http://hdl.handle.net/2451/26734
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| Title: | The Impact of Shareholder Control on Bondholders |
| Authors: | Cremers, K.J. Martijn
Nair, Vinay B.
Wei, Chenyang (Jason) |
| Issue Date: | Mar-2004 |
| Series/Report no.: | S-CDM-04-06 |
| Abstract: | This paper investigates the effect of shareholder control on bondholder
wealth. While stronger shareholder control can benefit bondholders by
disciplining managers, it also increases the likelihood of events that
can hurt bondholders, e.g. hostile takeovers. We hypothesize that
shareholder control can have contrasting effects on bond yields
depending on the takeover vulnerability of a firm. Using the presence of
an institutional blockholder to proxy for shareholder control and
firm-level anti-takeover provisions to proxy for takeover vulnerability,
we find that shareholder control is associated with lower yields if the
firm is protected from takeovers. We also find that shareholder control
is associated with higher yields if the firm is exposed to takeovers.
The contrasting effects of shareholder control on yields are the
strongest for firms that are small and have low leverage. In the
presence of shareholder control, the difference in bond yields due to
differences in takeover vulnerability can be as high as 93 basis points.
Further, the results are insignificant for a sub-sample of firms where
the bondholders are protected from takeovers through the poison put
covenant. Bond ratings also appear to incorporate a similar effect of
shareholder control on bondholders Finally, we find that a bond pricing
model that does not account for shareholder control generates an
annualized abnormal return of 1% to 1.4% for portfolios that long firms
with both strong shareholder control and high takeover vulnerability and
short firms without either shareholder control or takeover
vulnerability. Combined, these results suggest that the use of different
governance mechanisms, such as shareholder monitoring and takeover
vulnerability, depends on a firm’s capital structure and that
bond-pricing models should account for shareholder control. |
| URI: | http://hdl.handle.net/2451/26734 |
| Appears in Collections: | Credit & Debt Markets
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