Dead Hand Proxy Puts and Shareholder Value

We study the impact of Dead Hand Proxy Puts on shareholder value. Courts and commentators have characterized these terms as defenses against hedge fund activism that threaten to reduce firm value by entrenching underperforming managers and thereby increasing managerial agency costs. Our findings contradict this view. Using three court cases as a natural experiment, we find that shareholders do, not react negatively to the inclusion of a Dead Hand Proxy Put in a firm\u27s loan agreements. Not only do Dead Hand Proxy Puts not destroy firm value, they may even preserve it by deterring activists who would seek to extract wealth from creditors and other nonshareholder constituencies. We develop the policy implications of these findings and offer a direction for the evolution of legal doctrine in this area

Dead Hand Proxy Puts and Shareholder Value

We study the impact of Dead Hand Proxy Puts on shareholder value. Courts and commentators have characterized these terms as defenses against hedge fund activism that threaten to reduce firm value by entrenching underperforming managers and thereby increasing managerial agency costs. Our findings contradict this view. Using three court cases as a natural experiment, we find that shareholders do, not react negatively to the inclusion of a Dead Hand Proxy Put in a firm\u27s loan agreements. Not only do Dead Hand Proxy Puts not destroy firm value, they may even preserve it by deterring activists who would seek to extract wealth from creditors and other nonshareholder constituencies. We develop the policy implications of these findings and offer a direction for the evolution of legal doctrine in this area

Do Country Level Investor Protections Impact Security Level Contract Design? Evidence from Foreign Bond Covenants

This paper studies the ability of security-level contracts to substitute for poor country-level investor protections. Using a cross-country sample of restrictive covenants, we find that bond contacts are more likely to include covenants when creditor protection laws are weak. Further, the use of restrictive covenants in weak creditor protection countries is associated with a lower cost of debt. We also find that strong country-level shareholder rights are not necessarily harmful to bondholders. Overall, our findings suggest issuers and investors can create international contracts that overcome some of the deficiencies of country-level investor protections and facilitate access to external finance

Differences in Agency Problems between Public and Private Firms: Evidence from Top Management Turnover

We compare a primary outcome of corporate governance, the propensity to replace poorly performing managers, between public and private firms in a large cross-country sample. We show that public firms display a higher sensitivity of top management turnover to firm performance than private firms. We find that this difference in the sensitivity of management turnover to firm performance stems from the information production and monitoring function of public equity markets and from the market for corporate control. Our results suggest that agency problems in publicly traded firms may be less severe than previously anticipated and financial markets play an important governance role

The Notching Rule for Subordinated Debt and the Information Content of Debt Rating

"This paper provides new evidence regarding the information content of debt ratings. We show that noninvestment grade subordinated issues are consistently priced too high (the yield is too low), and the reverse is true for some investment grade bonds. We relate this empirical bias to a notching rule of thumb that is used in order to rate subordinated debt without expending additional resources for information production. We propose an explanation for these findings based upon a balance between an attempt to please the companies that pay the raters versus a concern for lawsuits and regulatory investigations should ratings be too optimistic." Copyright (c) 2010 Financial Management Association International.