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Do Country-level Investor Protections Affect Security-level Contract Design? Evidence from Foreign Bond Covenants

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  • Darius P. Miller
  • Natalia Reisel

Abstract

This article studies the ability of security-level contracts to substitute for poor country-level investor protections. Using a cross-country sample of restrictive covenants, we find that bond contacts are more likely to include covenants when creditor protection laws are weak. Further, the use of restrictive covenants in weak creditor protection countries is associated with a lower cost of debt. We also find that strong country-level shareholder rights are not necessarily harmful to bondholders. Overall, the findings suggest that issuers and investors can create international contracts that overcome some of the deficiencies of country-level investor protections and facilitate access to external finance. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Darius P. Miller & Natalia Reisel, 2012. "Do Country-level Investor Protections Affect Security-level Contract Design? Evidence from Foreign Bond Covenants," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 408-438.
  • Handle: RePEc:oup:rfinst:v:25:y:2012:i:2:p:408-438
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    File URL: http://hdl.handle.net/10.1093/rfs/hhr097
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    Cited by:

    1. Gu, Xian & Kowalewski, Oskar, 2014. "Law and Structure of the Capital Markets," Working Papers 14-20, University of Pennsylvania, Wharton School, Weiss Center.
    2. repec:eee:mulfin:v:40:y:2017:i:c:p:1-13 is not listed on IDEAS
    3. Hui Zhu & Kelly Cai, 2014. "Cultural Distance And Bond Pricing: Evidence In The Yankee And Rule 144a Bond Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 37(3), pages 357-384, September.
    4. Reisel, Natalia, 2014. "On the value of restrictive covenants: Empirical investigation of public bond issues," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 251-268.
    5. Cho, Seong-Soon & El Ghoul, Sadok & Guedhami, Omrane & Suh, Jungwon, 2014. "Creditor rights and capital structure: Evidence from international data," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 40-60.
    6. Luc Renneboog & Peter G. Szilagyi & Cara Vansteenkiste, 2017. "Creditor rights, claims enforcement, and bond performance in mergers and acquisitions," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 174-194, February.
    7. Andreas Engert & Lars Hornuf, 2013. "Market Standards in Public Sector Debt Contracting," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(3), pages 16-20, October.
    8. Gu, Xian & Kowalewski, Oskar, 2015. "Creditor rights and corporate bond market," MPRA Paper 67022, University Library of Munich, Germany.
    9. Hornuf, Lars & Engert, Andreas, 2013. "Can Network Effects Impede Optimal Contracting in Debt Securities?," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79867, Verein für Socialpolitik / German Economic Association.
    10. Prilmeier, Robert, 2017. "Why do loans contain covenants? Evidence from lending relationships," Journal of Financial Economics, Elsevier, vol. 123(3), pages 558-579.
    11. Timo Korkeamäki & Elina Rainio & Tuomas Takalo, 2013. "Reforming corporate law in an emerging market," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 21(3), pages 509-551, July.
    12. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    13. repec:ces:ifodic:v:11:y:2013:i:3:p:19097382 is not listed on IDEAS
    14. Schumacher, Julian & Chamon, Marcos & Trebesch, Christoph, 2015. "Foreign Law Bonds: Can They Reduce Sovereign Borrowing Costs?," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113199, Verein für Socialpolitik / German Economic Association.
    15. repec:pal:jintbs:v:48:y:2017:i:4:d:10.1057_s41267-016-0016-1 is not listed on IDEAS
    16. Charlene P. Spiceland & Leo L. Yang & Joseph H. Zhang, 2016. "Accounting quality, debt covenant design, and the cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1271-1302, November.

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