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Creditor Protection Laws and the Cost of Debt

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  • Sattar A. Mansi
  • William F. Maxwell
  • John K. Wald
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    Abstract

    We examine the impact of state payout restrictions on firms' credit ratings and bond yields. Using publicly traded bond data for a sample of large firms, we find that firms incorporated in states with more restrictive payout statutes (for example, New York and California) have better credit ratings and significantly lower yield spreads (about 8.7 percent) than do firms incorporated in less restrictive states (for example, Delaware). These results suggest that incorporation in a more restrictive state provides a credible commitment mechanism for avoiding some of the moral hazard problems associated with long-term debt. This commitment corresponds to an economically and statistically significant difference in market yields and firm-financing costs and is robust to controls for ownership, governance, debt type, Delaware or non-Delaware incorporation, and covenant usage. Overall, our results are consistent with the notion that Delaware incorporation has hidden costs for some firms. (c) 2009 by The University of Chicago. All rights reserved..

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    File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/605566
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

    Volume (Year): 52 (2009)
    Issue (Month): 4 (November)
    Pages: 701-717

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    Handle: RePEc:ucp:jlawec:v:52:y:2009:i:4:p:701-717

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. Giofré, Maela, 2013. "Investor protection rights and foreign investment," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 506-526.
    2. Bradley, Michael & Chen, Dong, 2011. "Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions," Journal of Corporate Finance, Elsevier, vol. 17(1), pages 83-107, February.
    3. Liu, Yixin & Jiraporn, Pornsit, 2010. "The effect of CEO power on bond ratings and yields," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 744-762, September.

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