Poison Bonds
Shuo Xia, Rex Wang Renjie
SSRN Discussion Paper,
2023
Abstract
This paper documents the rise of "poison bonds", which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% after 2005. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Further analyses suggest that this practice entrenches incumbent managers, coincidentally benefits bondholders, but destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of -7.3% per year. Our findings have important implications for understanding the agency benefits and costs of debt: (1) more debt does not necessarily discipline the management; and (2) even without financial distress, managerial entrenchment can lead to conflicts between shareholders and creditors.
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Research Profiles of the IWH Departments All doctoral students are allocated to one of the four research departments (Financial Markets – Laws, Regulations and Factor Markets –…
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The Geography of Information: Evidence from the Public Debt Market
Bill Francis, Iftekhar Hasan, Maya Waisman
Journal of Economic Geography,
No. 1,
2023
Abstract
nWe investigate the link between the spatial concentration of firms in large, central metropolitans (i.e. urban agglomeration) and the cost of public corporate debt. Looking at bond issues over the period 1985–2014, we find that bonds issued by companies headquartered in urban agglomerates have lower at-issue yield spreads than bonds issued by firms based in remote, sparsely populated areas. Measures of the count of institutional bondholders in a firm’s vicinity confirm that the spatial cross-sectional variation in bond spreads is driven by the proximity of metropolitan firms to large concentrations of institutional investors. Our results are robust to controls for firm productivity and governance, analyst following, and exogenous shocks to institutional investor attention. The effect of headquarters location on bond spreads is especially pronounced for more difficult to value, speculative-grade bonds, bonds issued by smaller, less visible firms and bonds issued without protective covenants. Overall, we provide evidence that the geographical distribution of firms and investors generates a corresponding distribution of value-relevant, firm-level information that affects its cost of capital.
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Corporate Governance Benefits of Mutual Fund Cooperation
Rex Wang Renjie, Patrick Verwijmeren, Shuo Xia
IWH Discussion Papers,
No. 21,
2022
Abstract
Mutual fund families increasingly hold bonds and stocks from the same firm. We study the implications of such dual holdings for corporate governance and firm decision-making. We present evidence that dual ownership allows financially distressed firms to increase investments and to refinance by issuing bonds with lower yields and fewer restrictive covenants. As such, dual ownership reduces shareholder-creditor conflicts, especially when families encourage cooperation among their managers. Overall, our results suggest that mutual fund families internalize the shareholder-creditor agency conflicts of their portfolio companies, highlighting the positive governance externalities of intra-family cooperation.
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Political Ties and Raising Capital in Global Markets: Evidence from Yankee Bonds
Gene Ambrocio, Xian Gu, Iftekhar Hasan
Journal of Corporate Finance,
June
2022
Abstract
This paper examines whether state-to-state political ties help firms obtain better terms when raising funds in global capital markets. Focusing on the Yankee bonds market, we find that issuances by firms from countries with close political ties with the US feature lower yield spreads, higher issuance amounts, and longer maturities. Such an association is more pronounced for firms located in low income and highly indebted countries as well as firms in government-related industries, first-time issuers, and relatively smaller firms. Our study provides evidence supporting the notion that country-level political relationship is an important factor when raising capital in international markets.
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Ricardian Equivalence, Foreign Debt and Sovereign Default Risk
Stefan Eichler, Ju Hyun Pyun
Journal of Economic Behavior and Organization,
May
2022
Abstract
We study the impact of sovereign solvency on the private-public savings offset. Using data on 80 economies for 1989–2018, we find robust evidence for a U-shaped pattern in the private-public savings offset in sovereign credit ratings. While the 1:1 savings offset is observed at intermediate levels of sovereign solvency, fiscal deficits are not offset by private savings at extremely low and high levels of sovereign solvency. Particularly, the U-shaped pattern is more pronounced for countries with high levels of foreign ownership of government debt. The U-shaped pattern is an emerging market phenomenon; additionally, it is confirmed when considering foreign currency rating and external public debt, but not for domestic currency rating and domestic public debt. For considerable foreign ownership of sovereign bonds, sovereign default constitutes a net wealth gain for domestic consumers.
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The Effects of Sovereign Risk: A High Frequency Identification Based on News Ticker Data
Ruben Staffa
IWH Discussion Papers,
No. 8,
2022
Abstract
This paper uses novel news ticker data to evaluate the effect of sovereign risk on economic and financial outcomes. The use of intraday news enables me to derive policy events and respective timestamps that potentially alter investors’ beliefs about a sovereign’s willingness to service its debt and thereby sovereign risk. Following the high frequency identification literature, in the tradition of Kuttner (2001) and Guerkaynak et al. (2005), associated variation in sovereign risk is then obtained by capturing bond price movements within narrowly defined time windows around the event time. I conduct the outlined identification for Italy since its large bond market and its frequent coverage in the news render it a suitable candidate country. Using the identified shocks in an instrumental variable local projection setting yields a strong instrument and robust results in line with theoretical predictions. I document a dampening effect of sovereign risk on output. Also, borrowing costs for the private sector increase and inflation rises in response to higher sovereign risk.
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Quid Pro Quo? Political Ties and Sovereign Borrowing
Gene Ambrocio, Iftekhar Hasan
Journal of International Economics,
November
2021
Abstract
Do stronger political ties with a global superpower improve sovereign borrowing conditions? We use data on voting at the United Nations General Assembly along with foreign aid flows to construct an index of political ties and find evidence that suggests stronger political ties with the US is associated with both better sovereign credit ratings and lower yields on sovereign bonds especially among lower income countries. We use official heads-of-state visits to the White House and coalition forces troop contributions as additional measures of the strength of political ties to further reinforce our findings.
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What Drives the Commodity-Sovereign Risk Dependence in Emerging Market Economies?
Hannes Böhm, Stefan Eichler, Stefan Gießler
Journal of International Money and Finance,
March
2021
Abstract
Using daily data for 34 emerging markets in the period 1994–2016, we find robust evidence that higher export commodity prices are associated with lower sovereign default risk, as measured by lower EMBI spreads. The economic effect is especially pronounced for heavy commodity exporters. Examining the drivers, we find that, first, commodity dependence is higher for countries that export large volumes of commodities, whereas other portfolio characteristics like volatility or concentration are less important. Second, commodity-sovereign risk dependence increases in times of recessions and expansionary U.S. monetary policy. Third, the importance of raw material prices for sovereign financing can likely be mitigated if a country improves institutions and tax systems, attracts FDI inflows, invests in manufacturing, machinery and infrastructure, builds up reserve assets and opens capital and trade accounts. Fourth, the country’s government indebtedness or amount of received development assistance appear to be only of secondary importance for commodity dependence.
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The Economic Record of the Government and Sovereign Bond and Stock Returns Around National Elections
Stefan Eichler, Timo Plaga
Journal of Banking and Finance,
September
2020
Abstract
This paper investigates the role of the fiscal and economic record of the incumbent government in shaping the price response of sovereign bonds and stocks to the election outcome in emerging markets and developed countries. For sovereign bonds in emerging markets, we find robust evidence for higher cumulative abnormal returns (CARs) if a government associated with a relatively low primary fiscal balance is voted out of office compared to elections where the fiscal balance was relatively high. This effect of the incumbent government's fiscal record is significantly more pronounced in the presence of high sovereign default risk and strong political veto players, whereas the quality of institutions does not explain differences in effects for different events. We do not find robust effects of the government's fiscal record for developed countries and stocks.
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