Published online by Cambridge University Press: 07 September 2020
We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in credit default swap spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through the “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.
We are indebted to Heitor Almeida and Rik Sen for their insightful comments and suggestions that improved the paper substantially. We are especially grateful to Praveen Kumar (the referee) whose comments and suggestions significantly improved our paper; and special thanks to Binay Adhikari, Brian Ayash, Dan Bernhardt, Hendrik Bessembinder (the editor), Jaewon Choi, Vincent Cuñat, Travis Davidson, Garland Durham, Ahmed Elnahas, Vyacheslav Fos, Martin Holmén, Maria Guadalupe, Charles Kahn, Amir Kermani, Incheol Kim, Mathias Kronlund, Dimitry Livdan, Mohsen Mollagholamali, Cyrus Ramezani, Hojong Shin (discussant), Adam Usman, Liying Wang (discussant), and seminar participants at the University of Illinois, University of Texas Rio Grande Valley, the 2015 Financial Management Association meeting, the 2018 Midwest Finance Association meeting for their helpful comments. All remaining errors are ours. The views expressed in this paper are those of the author(s) and do not represent those of the JPMorgan Chase & Co. We gratefully acknowledge financial support from the Orfalea College of Business.