Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-11-27T22:31:57.431Z Has data issue: false hasContentIssue false
  • English
  • Français

The Impact of Stronger Shareholder Control on Bondholders

Published online by Cambridge University Press:  07 September 2020

Sadra Amiri-Moghadam ,
Siamak Javadi Open the ORCID record for Siamak Javadi [Opens in a new window]  and
Mahdi Rastad Open the ORCID record for Mahdi Rastad [Opens in a new window]
Sadra Amiri-Moghadam
Affiliation:
JPMorgan Chase & [email protected]
Siamak Javadi*
Affiliation:
University of Texas Rio Grande Valley Robert C. Vackar College of Business & [email protected]
Mahdi Rastad
Affiliation:
California Polytechnic State University Orfalea College of [email protected]
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in credit default swap spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through the “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 4 , June 2021 , pp. 1259 - 1295
Copyright
© THE AUTHOR(S), 2020. PUBLISHED BY CAMBRIDGE UNIVERSITY PRESS ON BEHALF OF THE MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON

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.)

Footnotes

We are indebted to Heitor Almeida and Rik Sen for their insightful comments and suggestions that improved the paper substantially. We are especially grateful to Praveen Kumar (the referee) whose comments and suggestions significantly improved our paper; and special thanks to Binay Adhikari, Brian Ayash, Dan Bernhardt, Hendrik Bessembinder (the editor), Jaewon Choi, Vincent Cuñat, Travis Davidson, Garland Durham, Ahmed Elnahas, Vyacheslav Fos, Martin Holmén, Maria Guadalupe, Charles Kahn, Amir Kermani, Incheol Kim, Mathias Kronlund, Dimitry Livdan, Mohsen Mollagholamali, Cyrus Ramezani, Hojong Shin (discussant), Adam Usman, Liying Wang (discussant), and seminar participants at the University of Illinois, University of Texas Rio Grande Valley, the 2015 Financial Management Association meeting, the 2018 Midwest Finance Association meeting for their helpful comments. All remaining errors are ours. The views expressed in this paper are those of the author(s) and do not represent those of the JPMorgan Chase & Co. We gratefully acknowledge financial support from the Orfalea College of Business.

References

Anderson, R. C.; Mansi, S. A.; and Reeb, D. M.. “Board Characteristics, Accounting Report Integrity, and the Cost of Debt.” Journal of Accounting and Economics, 37 (2004), 315–342.10.1016/j.jacceco.2004.01.004CrossRefGoogle Scholar
Andres, C.; Betzer, A.; and Doumet, M.. “Measuring Abnormal Credit Default Swap Spreads.” Working Paper, Bauhaus-Universität Weimar (2017). Available at SSRN: https://ssrn.com/abstract=2194320.Google Scholar
Ashbaugh-Skaife, H.; Collins, D. W.; and LaFond, R.. “The Effects of Corporate Governance on Firms’ Credit Ratings.” Journal of Accounting and Economics, 42 (2006), 203–243.10.1016/j.jacceco.2006.02.003CrossRefGoogle Scholar
Asquith, P., and Wizman, T. A.. “Event Risk, Covenants, and Bondholder Returns in Leveraged Buyouts.” Journal of Financial Economics, 27 (1990), 195–213.CrossRefGoogle Scholar
Bach, L., and Metzger, D.. “How Close Are Close Shareholder Votes?” Review of Financial Studies, 32 (2019), 3183–3214.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Bebchuk, L., and Spamann, H.. “Regulating Banker’s Pay.” Georgetown Law Review, 98 (2010), 247–287.Google Scholar
Bhojraj, S., and Sengupta, P.. “Effect 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
Blanco, R.; Brennan, S.; and Marsh, I. W.. “An Empirical Analysis of the Dynamic Relation Between Investment-Grade Bonds and Credit Default Swaps.” Journal of Finance, 60 (2005), 2255–2281.CrossRefGoogle Scholar
Boyd, B. “Board Control and CEO Compensation.” Strategic Management Journal, 15 (1994), 335–344.CrossRefGoogle Scholar
Carcello, J., and Neal, T.. “Audit Committee Composition and Auditor Reporting.” Accounting Review, 75 (2000), 453–467.CrossRefGoogle Scholar
Cellini, S. R.; Ferreira, F.; and Rothstein, J.. “The Value of School Facility Investments: Evidence from a Dynamic Regression Discontinuity Design.” Quarterly Journal of Economics, 125 (2010), 215–261.CrossRefGoogle Scholar
Chava, S.; Kumar, P.; and Warga, A.. “Managerial Agency and Bond Covenants.” Review of Financial Studies, 23 (2010), 1120–1148.10.1093/rfs/hhp072CrossRefGoogle Scholar
Chava, S.; Livdan, D.; and Purnanandam, A.. “Do Shareholder Rights Affect the Cost of Bank Loans?” Review of Financial Studies, 22 (2009), 2973–3004.10.1093/rfs/hhn111CrossRefGoogle Scholar
Cook, D. O., and Martin, J. D.. “The Co-Insurance and Leverage Effects on Target Firm Bondholder Wealth.” In Research in Finance, Vol. 9. Chen, A., ed. Greenwich, CT: JAI Press (1991).Google Scholar
Cremers, K. J. M.; Nair, V. B.; and Wei, C.. “Governance Mechanisms and Bond Prices.” Review of Financial Studies, 20 (2007), 1359–1388.CrossRefGoogle Scholar
Cuñat, V.; Gine, M.; and Guadalupe, M.. “The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value.” Journal of Finance, 67 (2012), 1943–1977.CrossRefGoogle Scholar
DeAngelo, H.; and Rice, E.. “Antitakeover Charter Amendments and Shareholder Wealth.” Journal of Financial Economics, 11 (1983), 329–359.10.1016/0304-405X(83)90016-8CrossRefGoogle Scholar
Dechow, P.; and Sloan, R.. “Executive Incentives and the Horizon Problem: An Empirical Investigation.” Journal of Accounting and Economics, 14 (1991), 51–89.CrossRefGoogle Scholar
Duffie, D. “Credit Swap Valuation.” Financial Analysts Journal, 55 (1999), 73–87.CrossRefGoogle Scholar
Ericsson, J.; Jacobs, K.; and Oviedo, R.. “The Determinants of Credit Default Swap Premia.” Journal of Financial and Quantitative Analysis, 44 (2009), 109–132.10.1017/S0022109009090061CrossRefGoogle Scholar
Ertimur, Y.; Ferri, F.; and Stubben, S. R.. “Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals.” Journal of Corporate Finance, 16 (2010), 53–72.CrossRefGoogle Scholar
Fields, P. L.; Fraser, D. R.; and Subrahmanyam, A.. “Board Quality and the Cost of Debt Capital: The Case of Bank Loans.” Journal of Banking & Finance, 36 (2012), 1536–1547.CrossRefGoogle Scholar
Finkelstein, S., and Hambrick, D.. “Chief Executive Compensation: A Study of the Intersection of Markets and Political Processes.” Strategic Management Journal, 10 (1989), 121–134.CrossRefGoogle Scholar
Finnerty, J.; Miller, C.; and Chen, R. R.. “The Impact of Credit Rating Announcements on Credit Default Swap Spreads.” Journal of Banking and Finance, 37 (2013), 2011–2030.10.1016/j.jbankfin.2013.01.028CrossRefGoogle Scholar
Fortin, S.; Subramaniam, C.; Wang, X.; and Zhang, S.. “Incentive Alignment through Performance-Focused Shareholder Proposals on Management Compensation.” Journal of Contemporary Accounting & Economics, 10 (2014), 130–147.CrossRefGoogle Scholar
Friewald, N.; Wagner, C.; and Zechner, J.. “The Cross-Section of Credit Risk Premia and Equity Returns.” Journal of Finance, 69 (2014), 2419–2469.CrossRefGoogle Scholar
Ghosh, A., and Jain, P. C.. “Financial Leverage Changes Associated with Corporate Mergers.” Journal of Corporate Finance, 6 (2000), 377–402.CrossRefGoogle Scholar
Gompers, P.; Ishii, J.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–156.CrossRefGoogle Scholar
Heckman, J. J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–161.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, (2003), 7–26.Google Scholar
Hu, A., and Kumar, P.. “Managerial Entrenchment and Payout Policy.” Journal of Financial and Quantitative Analysis, 39 (2004), 759–790.CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C. “The Modern Industrial Revolution, Exit, and Failure of Internal Control Systems.” Journal of Finance, 48 (1993), 35–44.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jensen, M. C., and Murphy, K. J.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.10.1086/261677CrossRefGoogle Scholar
Jiang, W.; Li, K.; and Shao, P.. “When Shareholders Are Creditors: Effects of the Simultaneous Holding of Equity and Debt by Non-Commercial Banking Institutions.” Review of Financial Studies, 23 (2010), 3595–3637.CrossRefGoogle Scholar
Jorion, P., and Zhang., G. “Good and Bad Credit Contagion: Evidence from Credit Default Swaps.” Journal of Financial Economics, 84 (2007), 860–883.CrossRefGoogle Scholar
Karpoff, J.; Malatesta, P.; and Walkling, R.. “Corporate Governance and Shareholder Initiatives: Empirical Evidence.” Journal of Financial Economics, 42 (1996), 365–395.CrossRefGoogle Scholar
Kim, E. H., and McConnell, J. J.. “Corporate Mergers and the Co-Insurance of Corporate Debt.” Journal of Finance, 32 (1977), 349–365.CrossRefGoogle Scholar
Klock, M. S.; Mansi, S. A.; and Maxwell, W. F.. “Does Corporate Governance Matter to Bondholders?” Journal of Financial and Quantitative Analysis, 40 (2005), 693–719.CrossRefGoogle Scholar
Leland, H. E. “Corporate Debt Value, Bond Covenants, and Optimal Capital Structure.” Journal of Finance, 49 (1994), 1213–1252.CrossRefGoogle Scholar
Longstaff, F. A.; Mithal, S.; and Neis, E.. “Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market.” Journal of Finance, 60 (2005), 2213–2253.10.1111/j.1540-6261.2005.00797.xCrossRefGoogle Scholar
Marais, L.; Schipper, K.; and Smith, A.. “Wealth Effects of Going Private for Senior Securities.” Journal of Financial Economics, 23 (1989), 155–191.CrossRefGoogle Scholar
Maxwell, W. F., and Rao, R. P.. “Do Spin-Offs Expropriate Wealth from Bondholders?” Journal of Finance, 58 (2003), 2087–2108.CrossRefGoogle Scholar
Maxwell, W. F., and Stephens, C. P.. “The Wealth Effects of Repurchases on Bondholders.” Journal of Finance, 58 (2003), 895–920.CrossRefGoogle Scholar
McConnell, J., and Servaes, H.. “Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990), 595–612.CrossRefGoogle Scholar
Merton, R. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance, 29 (1974), 449–470.Google Scholar
Murphy, K. “Corporate Performance and Managerial Remuneration: An Empirical Analysis.” Journal of Accounting and Economics, 7 (1985), 11–42.CrossRefGoogle Scholar
Murphy, K., and Zimmerman, J.. “Financial Performance Surrounding CEO Turnover.” Journal of Accounting and Economics, 16 (1993), 273–315.CrossRefGoogle Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–175.10.1016/0304-405X(77)90015-0CrossRefGoogle Scholar
Parrino, R. “CEO Turnover and Outside Succession: A Cross-Sectional Analysis.” Journal of Financial Economics, 46 (1997), 165–197.CrossRefGoogle Scholar
Parrino, R., and Weisbach, M. S.. “Measuring Investment Distortions Arising from Stockholder–Bondholder Conflicts.” Journal of Financial Economics, 53 (1999), 3–42.CrossRefGoogle Scholar
Sengupta, P. “Corporate Disclosure Quality and the Cost of Debt.” Accounting Review, 73 (1998), 459–474.Google Scholar
Shleifer, A., and Summers, L. H.. “Breach of Trust in Hostile Takeovers.” In Corporate Takeovers: Causes and Consequences, Auerbach, A.J., ed. Chicago, IL: University of Chicago Press (1988).Google Scholar
Shleifer, A., and Vishny, R.. “Large Shareholders and Corporate Control.” Journal of Political Economy, 94 (1986), 461–488.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “Management Entrenchment: The Case of Manager-Specific Investments.” Journal of Financial Economics, 25 (1989), 123–139.10.1016/0304-405X(89)90099-8CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “A Survey of Corporate Governance.” Journal of Finance, 52 (1997), 737–783.CrossRefGoogle Scholar
Subrahmanyam, M. G.; Tang, D. Y.; and Wang, S. Q.. “Does the Tail Wag the Dog? The Effect of Credit Default Swaps on Credit Risk.” Review of Financial Studies, 27 (2014), 2926–2960.10.1093/rfs/hhu038CrossRefGoogle Scholar
Sunder, J.; Sunder, S. V.; and Wongsunwai, W.. “Debtholder Responses to Shareholder Activism: Evidence from Hedge Fund Interventions.” Review of Financial Studies, 27 (2014), 3318–3342.CrossRefGoogle Scholar
Warga, A., and Welch, I.. “Bondholder Losses in Leveraged Buyouts.” Review of Financial Studies, 6 (1993), 959–982.CrossRefGoogle Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.CrossRefGoogle Scholar
Supplementary material: PDF

Amiri-Moghadam et al. supplementary material

Amiri-Moghadam et al. supplementary material

Download Amiri-Moghadam et al. supplementary material(PDF)
PDF 552.5 KB