The role of reputable auditors and underwriters in the design of bond contracts

The authors empirically test the certification hypothesis by studying the roles of reputable auditors and bank underwriters in the design of bond contracts. The certification hypothesis suggests that reputable capital market intermediaries can credibly communicate inside information to outside investors, thereby helping improve financing terms for firms that raise external funding. Consistent with this hypothesis, the authors provide evidence that reputable auditors and underwriters help corporate bond issuers obtain lower bond yields. The effect of reputable auditors on the yields is greater than that of reputable underwriters in terms of economic magnitude and significance, consistent with auditors’ multiple roles as information intermediaries, monitors, and insurance providers. The authors also find that the presence of reputable auditors and underwriters affects bonds’ nonpricing terms. Firms that hire reputable auditors obtain longer term bonds, whereas those that engage reputable underwriters can issue larger bonds. Taken together, the results suggest that reputable auditors and underwriters have integral, but different, roles in the bond-issuing process. </jats:p

Default clauses in debt contracts

We examine the determinants of events of default clauses in syndicated loan and bond contracts, provisions that allow lenders to request the repayment of principal and to terminate lending commitments. We document significant variation in the use of default clauses and their restrictiveness within the same type of lending contract but also across loans and bonds. We find that default clauses in public bond contracts are less restrictive than those in syndicated loan contracts. We also document that two ex ante proxies for bankruptcy costs, the level of intangible assets and capitalized research and development expenditures at the time of debt contracting, are associated with less restrictive default clauses, especially in bond contracts. We conclude that bondholders attempt to mitigate the occurrence of inefficient defaults. Given their inability to coordinate with each other and their ownership of subordinated claims, bondholders incur higher default costs than bank lenders

Corporate diversification and the cost of debt: the role of segment disclosures

Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the coinsurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information

The UBS-Credit Suisse Merger: Helvetia’s Gift

The UBS- Credit Suisse (CS) merger in March 2023, one of the biggest banking union in history, was an emergency rescue deal engineered by Swiss authorities to avoid more market-shaking turmoil in global banking. The merger resulted in a significant increase in the combined stakeholder net wealth, totaling 22.8 billion US dollars. This increase was distributed around the merger announcement through abnormal returns to UBS stockholders (7.95%) and CS bondholders (34.74%), equivalent to approximately 5.1 billion and 18.8 billion US dollars, respectively. In contrast, CS stockholders experienced negative abnormal stockholder returns of -55% (-1.1 billion USD) while the UBS bonds’ value was not impacted by the merger. We infer that UBS stockholders received a wealth transfer from CS stockholders and that this transfer is likely explained by unusual restrictions on the number of bidders for CS. The observed effects on bondholders’ wealth align with previous research on coinsurance and the implications of “too-big-to-fail” research findings. We conclude that the combined wealth effect, which cannot be attributed to the short-term abnormal returns on securities of the two banks, is externally driven. It appears to come at the expense of taxpayers: the merger-bailout has increased Switzerland’s sovereign credit risk, resulting in an estimated 6 to 7 billion US dollars in additional debt costs for the country

Implied Bond Liquidity

Abstract We propose a new class of implied liquidity measures (ILMs) for bonds with limited transaction data by combining multiple approaches to measuring liquidity and datasets -heretofore only used separately. Generated by aggregating a bond&apos;s owners&apos; liquidity preferences -revealed by the average liquidity of their bond holdings -ILMs are strongly robust. The high frequency of ILMs allows us to explicitly quantify a bond&apos;s systematic liquidity risk in the sense of Acharya and Pedersen (2005). We find liquidity risk to have a significant effect on bond spreads, incremental to that of liquidity level. Both effects dramatically increase during the current financial crisis