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Control/ownership structure, creditor rights protection, and the cost of debt financing: International evidence

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  • Boubakri, Narjess
  • Ghouma, Hatem
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    Abstract

    We explore the effect of governance on bond yield-spreads and ratings in a multinational sample of firms. We find strong evidence that ultimate ownership (i.e., the voting/cash-flow rights wedge) and family control have a positive and significant effect on bond yield-spreads, and a negative and significant effect on bond ratings. Control in the hands of widely held financial firms has a positive effect on bond ratings only, while State control has no effect on either bond yield-spreads or ratings. We also find that a higher protection of debtholders' rights generally reduces bond yield-spreads and increases bond ratings. Our results additionally show that, for both bondholders and rating agencies, the enforcement of debt laws is crucially important. Finally, we document a negative effect of debt covenants on debt costs when there is a high expropriation risk and poor creditor rights protection.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2481-2499

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2481-2499

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Bond yields and ratings Ultimate ownership Investor protection Debt enforcement;

    References

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    Cited by:
    1. Kabir, Rezaul & Li, Hao & Veld-Merkoulova, Yulia V., 2013. "Executive compensation and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2893-2907.
    2. Najah Attig & Sadok El Ghoul & Omrane Guedhami & Sorin Rizeanu, 2013. "The governance role of multiple large shareholders: evidence from the valuation of cash holdings," Journal of Management and Governance, Springer, vol. 17(2), pages 419-451, May.
    3. Wagenvoort, Rien J.L.M. & Ebner, André & Morgese Borys, Magdalena, 2011. "A factor analysis approach to measuring European loan and bond market integration," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 1011-1025, April.
    4. Klein, Rudolf F. & Chow, Victor K., 2013. "Orthogonalized factors and systematic risk decomposition," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 175-187.
    5. Waisman, Maya, 2013. "Product market competition and the cost of bank loans: Evidence from state antitakeover laws," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4721-4737.
    6. Barry, Thierno Amadou & Lepetit, Laetitia & Tarazi, Amine, 2011. "Ownership structure and risk in publicly held and privately owned banks," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1327-1340, May.
    7. Amine Tarazi & Nadia Zedek, 2013. "Excess Control Rights, Financial Crisis and Bank Profitability and Risk," Working Papers hal-00916550, HAL.
    8. Lim, Youngdeok, 2011. "Tax avoidance, cost of debt and shareholder activism: Evidence from Korea," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 456-470, February.
    9. Andrade, Sandro C. & Bernile, Gennaro & Hood, Frederick M., 2014. "SOX, corporate transparency, and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 145-165.
    10. Boubaker, Sabri & Mansali, Hatem & Rjiba, Hatem, 2014. "Large controlling shareholders and stock price synchronicity," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 80-96.
    11. Forssbæck, Jens, 2011. "Ownership structure, market discipline, and banks' risk-taking incentives under deposit insurance," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2666-2678, October.
    12. Bosch, Oliver & Steffen, Sascha, 2011. "On syndicate composition, corporate structure and the certification effect of credit ratings," Journal of Banking & Finance, Elsevier, vol. 35(2), pages 290-299, February.
    13. Chen, Hsuan-Chi & Hao, (Grace) Qing, 2011. "Insider trading law enforcement and gross spreads of ADR IPOs," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1907-1917, August.
    14. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2013. "Excess control rights, bank capital structure adjustment and lending," Working Papers hal-00967892, HAL.
    15. Laetitia Lepetit & Amine Tarazi & Nadia Zedek, 2012. "Bank Regulatory Capital Adjustment and Ultimate Ownership Structure: Evidence from European Commercial Banks," Working Papers hal-00918577, HAL.
    16. Di Giuli, Alberta & Caselli, Stefano & Gatti, Stefano, 2011. "Are small family firms financially sophisticated?," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2931-2944, November.

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