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Does Corporate Governance Matter to Bondholders?

Published online by Cambridge University Press:  06 April 2009

Mark S. Klock ,
Sattar A. Mansi  and
William F. Maxwell
Mark S. Klock
Affiliation:
klock@gwu.edu, School of Business, George Washington University, 2020 G Street, NW, Washington, DC 20052
Sattar A. Mansi
Affiliation:
smansi@vt.edu, Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061
William F. Maxwell
Affiliation:
maxwell@eller.arizona.edu, Eller College of Business, University of Arizona, Tucson, AZ 85721.
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Abstract

We examine the relation between the cost of debt financing and a governance index that contains various antitakeover and shareholder protection provisions. Using firm-level data from the Investors Research Responsibility Center for the period 1990–2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with the strongest management rights (strongest antitakeover provisions) and firms with the strongest shareholder rights (weakest antitakeover provisions), we find that strong antitakeover provisions are associated with a lower cost of debt financing while weak antitakeover provisions are associated with a higher cost of debt financing, with a difference of about 34 basis points between the two groups. Overall, the results suggest that antitakeover governance provisions, although not beneficial to stockholders, are viewed favorably in the bond market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 4 , December 2005 , pp. 693 - 719
Copyright
Copyright © School of Business Administration, University of Washington 2005

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