Do corporate bond recovery rates monitored by corporate governance mechanisms?
Abstract
Purpose
The purpose of this paper is to examine the relationship between corporate governance (CG) and firms’ bond recovery rates (RRs). The authors hypothesize that governance features impact RRs by controlling agency costs that result from conflicts between bondholders and shareholders. The authors also test the relationship between CG and RRs during the last crisis.
Design/methodology/approach
The authors use a generalized method of moments regression model to test the relationship between CG and firms’ bond RRs. The authors employ a direct measure of recoveries rates from Moody’s ultimate recovery database covering the period from 2003 to 2012. Both firm-level CG and country-level variables are used to examine the determinants of corporate bonds RRs.
Findings
The results support a significant impact of CG mechanisms on bond RRs mainly during crisis period. The authors find that firms operating with CEO-Duality decrease their bond RRs during financial crisis. This implies wealth transfers from bondholders to shareholders and provides one explanation why some firms operate with weak governance.
Originality/value
This paper provides the first direct evidence that corporate bond RRs are directly related to CG mechanisms. The authors combine firm-level CG and country-level variables to examine the determinants of corporate bonds RRs. Earlier studies focussed on financial firm-level data and macro-economic variables. The authors also test the impact of board composition and ownership structure on bond recoveries.
Keywords
Acknowledgements
JEL Classification — G21, G28, G33
Citation
Mili, M. and Abid, S. (2016), "Do corporate bond recovery rates monitored by corporate governance mechanisms?", Managerial Finance, Vol. 42 No. 8, pp. 830-848. https://doi.org/10.1108/MF-06-2015-0180
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited