Golden Parachutes, Incentives, and the Cost of Debt

We examine the relation between the presence of golden parachutes and the cost of debt financing. We hypothesize that since golden parachutes compensate CEOs in the event of termination, CEOs with golden parachutes will have an incentive to increase firm risk and decrease effort, and this will lead to a higher cost of debt. Consistent with these hypotheses, we document a significant positive relation between the use of golden parachutes and the cost of debt. We confirm these results with a natural experiment using a difference-in-difference specification based on a 2004 change in IRS tax regulations. Moreover, we find that the adoption of a golden parachute is associated with an increase in firm risk, a higher likelihood of CEO turnover, and a lower operating performance. Overall, the evidence suggests that golden parachutes are primarily negative for the firm and for debt holders in particular.Golden parachutes, cost of debt, takeover probability, firm risk, CEO turnover

Founding family ownership and the agency cost of debt

Abstract We investigate the impact of founding family ownership structure on the agency cost of debt. We find that founding family ownership is common in large, publicly traded firms and is related, both statistically and economically, to a lower cost of debt financing. Our results are consistent with the idea that founding family firms have incentive structures that result in fewer agency conflicts between equity and debt claimants. This suggests that bond holders view founding family ownership as an organizational structure that better protects their interests.

Firm Reputation and Cost of Debt Capital

We examine the relation between firm reputation and the cost of debt financing. We posit that corporate reputation represents “soft information” not captured by balance sheet variables, which is nonetheless valuable to lenders. Using Fortune magazine’s survey of company reputation, we find an inverse relation between a company’s reputation and its bond credit spreads. We also find that firms with high reputation face less stringent covenants and are less likely to be the target of SEC fraud investigations. Further testing shows that bad reputation is a good ex ante predictor of corporate failure. Our study provides evidence that firm reputation is an important consideration in the pricing of corporate public debt

Does Corporate Governance Matter to Bondholders?

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 through 2000, we find that antitakeover governance provisions lower the cost of debt financing. Segmenting the data into firms with strongest management rights (strongest antitakeover provisions) and firms with 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 thirty-four 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

Assessing Credit Rating Agencies by Bond Issuers and Institutional Investors

We examine how a sample of publicly traded corporate bond issuers and institutional investors assess the four major nationally recognized rating agencies and their role in capital markets. The results show that issuers and investors differ dramatically in their assessments about rating agencies. Specifically, the majority of institutional investors require only one rating when they buy rated corporate bonds, but most issuers obtain two or more ratings. Issuers and investors also differ in their assessments about whether ratings accurately reflect creditworthiness and timeliness. The results suggest that differences reflect the different roles that rating agencies provide in the market place. Copyright Blackwell Publishers Ltd 2002.