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Corporate Governance, Product Market Competition and Debt Financing

Teodora Paligorova () and Jun Yang

Staff Working Papers from Bank of Canada

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.

Keywords: Financial; markets (search for similar items in EconPapers)
JEL-codes: G12 G34 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014
New Economics Papers: this item is included in nep-bec and nep-com
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