How do Corporate Governance Decisions Affect Bondholders?

Hong Li () and Yuan Wang
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Hong Li: Center of Credit Research, Shanghai University of Finance and Economics, China
Yuan Wang: Concordia University, Canada

Quarterly Journal of Finance (QJF), 2016, vol. 06, issue 03, 1-23

Abstract: Existing studies have documented a negative relationship between the GIM corporate governance index (which contains anti-takeover provisions) and the corporate cost of debt, which implies that fewer anti-takeover provisions may lead to a larger shareholder expropriation of bondholder wealth. That is, strong corporate governance hurts bondholders (asset substitution hypothesis). However, another stream of research asserts that governance mechanisms may benefit bondholders by paring down agency costs and decreasing information asymmetry between the firm and the lenders (monitoring hypothesis). We reexamine this issue by considering the self-selection effect. We find that both hypotheses can be true, and that firms consider the reduction of cost of debt when self-selecting their governance, and the cost of debt would have been much higher had the alternative governance decision been made.

Keywords: Corporate governance; cost of debt (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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DOI: 10.1142/S2010139216500117

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