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Corporate Governance, Product Market Competition and Debt Financing

Author

Listed:
  • Teodora Paligorova
  • Jun Yang

Abstract

This paper examines the impact of product market competition and corporate governance on the cost of debt financing and the use of bond covenants. We find that more anti-takeover provisions are associated with a lower cost of debt only in competitive industries. Because they are exposed to higher takeover risk in competitive industries, bondholders charge higher bond spreads to firms that have fewer anti-takeover provisions. Once firms’ anti-takeover provisions are in place, we find that bondholders use fewer payment and debt priority covenants in competitive industries. Our results suggest that product market competition plays a crucial role in explaining the way a firm’s anti-takeover protection affects the cost of debt and the use of bond covenants.

Suggested Citation

  • Teodora Paligorova & Jun Yang, 2014. "Corporate Governance, Product Market Competition and Debt Financing," Staff Working Papers 14-5, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-5
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    References listed on IDEAS

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    1. Klock, Mark S. & Mansi, Sattar A. & Maxwell, William F., 2005. "Does Corporate Governance Matter to Bondholders?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(04), pages 693-719, December.
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    5. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    6. Valta, Philip, 2012. "Competition and the cost of debt," Journal of Financial Economics, Elsevier, vol. 105(3), pages 661-682.
    7. repec:hrv:faseco:30728046 is not listed on IDEAS
    8. Zhdanov, Alexei, 2007. "Competitive Equilibrium with Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(03), pages 709-734, September.
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    More about this item

    Keywords

    Financial markets;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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