How does managerial opportunism affect the cost of debt financing?

Ghouma, Hatem

doi:10.1016/j.ribaf.2016.07.007

Cited by 40 publications

(23 citation statements)

References 26 publications

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“…On one hand, the lack of monitoring for bondholders can encourage managers to reduce creditors' wealth, which leads to credit quality deterioration. Hence, bondholders may require a higher interest rate to offset these risks (Saito, Sheng, & Bandeira, 2007;Ghouma, 2017).…”

Section: Agency Theorymentioning

confidence: 99%

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Guimarães

Malaquias

2020

BBR

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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. KEYWORDS bondholders' protection index, corporate bonds, multimarket funds, risk, corporate financing 1. INTRODUCTION Corporate 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 sha...

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Section: Agency Theorymentioning

confidence: 99%

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Guimarães

Malaquias

2020

BBR

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“…Shleifer and Vishny (1989) find negative wealth effect of managerial entrenchment due to increase in the agency cost between the managers and the stockholders. Ghouma (2017) finds that lower level of managerial entrenchment is associated with lower corporate bond costs and higher bond credit ratings. Billet et al (2007) finds that the firms with risky debt outstanding are less likely to be a takeover target.…”

Section: Erc Agency Issues and Market Frictionsmentioning

confidence: 94%

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Tewari

2018

Business: Theory and Practice

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We analyse security design parameters of 1,115 high yield (HY) and investment grade (IG) event risk covenants (ERC) protected issues between 1986 and 2012 from the agency conflict perspective. We find positive and significant stock price reaction to the issuance of HY but not the IG issues. Although, majority of these issues carry a call provision, we find significant design differences in the call provision between HY and IG issues. We find that HY issues provide strong call protection to mitigate the risk of a call due to ratings upgrade, compromising firm’s financial flexibility; resulting financial distress is mitigated by the ERC. IG issues provide weak call protection to fully exploit growth options however, role of ERC is not apparent. We also find evidence of increase in managerial entrenchment due to the presence of ERC in HY firms however, reduction in agency cost of debt supersedes cost of managerial entrenchment.

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“…The decline in funding growth from Third Party Funds has declined from 19.08% in 2011 to reach 6.89% in 2018. Higher bond costs and lower credit ratings are generally associated with increased income (Ghouma, 2017).…”

Section: Introductionmentioning

confidence: 99%

The Role of Monitoring and Bonding Mechanisms of Good Corporate Governance Towards Banks Performance

Lestari

Wahyudi

Muharam

et al. 2020

HSSR

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Purpose of the study: This paper aims to examine the effects of the monitoring mechanism and bonding mechanism of corporate governance on the performance of the bank. The monitoring mechanism is divided into an external mechanism, represented by concentrated ownership, and the internal mechanism is represented by the proportion of independent board. Bonding mechanism is measured issuance of bonds as long-term debt financing.Methodology: This study is predictive and exploratory, so the Partial Least Squares Structural Equation Modeling using a WarpPLS60 application. Researchers use data from 24 banks that constantly has the value of bonds circulated, which from 2011 to 2018. There are consists of 4 state-owned commercial banks, 13 private banks, and 7 regional governmentowned banks. Main Findings:The researcher found that external monitoring mechanisms as measured by ownership concentration, positively and significantly influence the performance at government-owned banks. Internal monitoring mechanism, as measured by the percentage of the number of independent commissioners, positively and significantly affects the performance at all the banks. The bonding mechanism as measured by issuing bonds negatively and significantly affects the performance of all the banks. Applications of this study:The integrative multi-theory model proposed by the authors in this study is a unique contribution to the intermediary financial literature. Banks seeking to maximize their performance must be balanced with the interests of shareholders and their stakeholders. Novelty/Originality of this study:The study examined the differences in behaviour and the role of monitoring and bonding mechanisms of corporate governance in state-owned banks and private. The results of this study contribute to the theory of entrenchment and financial intermediation.

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How does managerial opportunism affect the cost of debt financing?

Cited by 40 publications

References 26 publications

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Bonds, Bondholders Protection and Asset Allocation of Multimarket Funds

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

The Role of Monitoring and Bonding Mechanisms of Good Corporate Governance Towards Banks Performance

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