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Corporate Governance, Product Market Competition and Debt Financing

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This paper examines the impact of product market competition and corporate governance on the cost of debt financing and the use of bond covenants. We find that more anti-takeover provisions are associated with a lower cost of debt only in competitive industries. Because they are exposed to higher takeover risk in competitive industries, bondholders charge higher bond spreads to firms that have fewer anti-takeover provisions. Once firms’ anti-takeover provisions are in place, we find that bondholders use fewer payment and debt priority covenants in competitive industries. Our results suggest that product market competition plays a crucial role in explaining the way a firm’s anti-takeover protection affects the cost of debt and the use of bond covenants.

Topic(s): Financial markets
JEL Code(s): G, G1, G12, G3, G34