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Governance Mechanisms and Bond Prices

Listed author(s):
  • Martijn Cremers
  • Vinay Nair
  • Chenyang Wei

We investigate the effects of shareholder governance mechanisms on bondholders and document two new findings. First, the impact of shareholder control (proxied by large institutional blockholders) on credit risk depends on takeover vulnerability. Shareholder control is associated with higher (lower) yields if the firm is exposed to (protected from)takeovers. In the presence of shareholder control, the difference in bond yields due to differences in takeover vulnerability can be as high as 66 basis points. Second, event risk covenants reduce the credit risk associated with strong shareholder governance. Therefore, without bond covenants, shareholder governance and bondholder interests diverge.

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File URL: http://icfpub.som.yale.edu/publications/2484
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2484.

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Date of creation: 01 Oct 2004
Date of revision: 01 Nov 2006
Handle: RePEc:ysm:somwrk:amz2484
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. K.J. Martijn Cremers & Vinay B. Nair, 2003. "Governance Mechanisms and Equity Prices," Yale School of Management Working Papers ysm376, Yale School of Management.
  2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
  3. K. J. Martijn Cremers & Vinay B. Nair, 2005. "Governance Mechanisms and Equity Prices," Journal of Finance, American Finance Association, vol. 60(6), pages 2859-2894, December.
  4. Daines, Robert & Klausner, Michael, 2001. "Do IPO Charters Maximize Firm Value? Antitakeover Protection in IPOs," Journal of Law, Economics and Organization, Oxford University Press, vol. 17(1), pages 83-120, April.
  5. Crabbe, Leland, 1991. " Event Risk: An Analysis of Losses to Bondholders and "Super Poison Put" Bond Covenants," Journal of Finance, American Finance Association, vol. 46(2), pages 689-706, June.
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