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Abstract

This paper aims to create a bondholders' protection index (BPI) and to investigate what the influence of this index would be on multimarket funds' allocation in corporate bonds. Understanding this relation is relevant because only about 1.36% of multimarket funds' portfolios correspond to debentures. This study advances the literature by covering a topic little discussed in a Brazilian context, proposing the creation of a BPI, which would be related to the number of automatic maturity clauses, which guarantee immediate payment to bondholders in cases of the rupture of a contract. This research comprised 926 debentures series issued in Brazil from 2009 to 2017, and 1,753 multimarket funds, which allocated some portfolios' percentage in these securities. In creating the BPI, we contemplated 15 restrictive clauses, which the most common correspond to negligent business performance, liquidation, dissolution and bankruptcy, and restrictions related to company structure. Moreover, we examined less common restrictive clauses as well, including indebtedness policy, shares issuance and amortization, and ratings downgrading. Regarding data analysis, we employed multiple linear regression models, with pooled estimators, applying the standard error correction by White's robust matrix (1980). The main results suggest that BPI positively effects multimarket funds' allocation in debentures. Furthermore, this influence is more intense in indentures with higher number of clauses with automatic maturity. Thus, this study contributes to literature about restrictive clauses, since it demonstrates that debentures' flexible and adaptable structure seems to be interesting for the main bondholders in Brazil. KEYWORDSbondholders' protection index, corporate bonds, multimarket funds, risk, corporate financing INTRODUCTIONCorporate bonds are fundamental financing instruments for institutional investors (Liu, Dai, & Wang, 2016) and mutual funds are one of the main debentures' subscribers in Brazil (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais [Brazilian Financial and Capital Markets Association], Capital Markets Bulletin, 2018;Paula, Faria Jr., 2012). They seem to be a safe investment option, due to the guarantee of creditors' payment, which involves the amount invested plus interest. However, when companies' managers opt for actions that increase investment risk, it can result in losses for bondholders (Kahan, 1995).Thus, corporate bonds financing leads to agency conflict between shareholders/ managers and bondholders, which reduces firms' value (Saito, Sheng, & Bandeira, 2007). Bondholders generally choose to protect themselves from managers' negligent performance, by means of indentures' restrictive clauses (Nash, Nette, & Poulsen, 2003). This paper aims at creating a bondholders' protection index (BPI) and at investigating what is the influence of this index on multimarket funds allocation in corporate bonds.Covenants are the cheapest way of mitigating potential issues in the relationship between sharehold...