Creditor Protection Laws and the Cost of Debt
AbstractWe 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..
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by University of Chicago Press in its journal The Journal of Law and Economics.
Volume (Year): 52 (2009)
Issue (Month): 4 (November)
Contact details of provider:
Web page: http://www.journals.uchicago.edu/JLE/
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division).
If references are entirely missing, you can add them using this form.