Managers, Owners, and The Pricing of Risky Debt: An Empirical Analysis

Abstract

This article examines managerial ownership structure and return premia on corporate bonds. It is argued that when managerial ownership is low, an increase in managerial ownership increases management's incentives to increase stockholder wealth at the expense of bondholder wealth. When ownership increases more, however, it is argued that management becomes more risk averse, with incentives more closely aligned with bondholders. This study finds a positive relation between managerial ownership and bond return premia in the low to medium (5 to 25 percent) ownership range. There is also weak evidence for a nonpositive relation in the large (over 25 percent) ownership range.

Demand for Audit Quality in Private Firms: Evidence on Ownership Effects

“…The central idea behind these problems is that when companies use debt finance, they have an incentive to take risks that they might avoid when investing the owners' own money. Bagnani et al (1994) further suggest that, at some level of managerial ownership, managers have increased incentives to act in the shareholders' best interests and take risks that are potentially harmful to the bondholders' best interests. Their findings suggest that managers who hold medium levels of corporate equity are more willing to take excessive risks than are managers who do not hold equity in the firm or managers who have a very large equity stake.…”

Bank Debt versus Bond Debt: Evidence from Secondary Market Prices

“…SENIOR and SECURED each take a value of one if a loan or a bond is classified likewise and zero otherwise. COVENANT SCORE is the sum of four dummy variables that represent four loan/bond covenants as described in Smith and Warner (1979) and Bagnani et al (1994), namely, INVCOV = 1 for restrictions on investments, DIVCOV = 1 for restrictions on dividends, FINCOV = 1 for restrictions of financing, and PAYCOV = 1 for covenants modifying payoff to investors. ** and *** stand for statistical significance at the 5% and 1% levels, respectively, using a two-tailed test, and nm refers to "not meaningful."…”

Risk Shifts Following Sarbanes‐Oxley: Influences of Disclosure and Governance

“…However, other studies suggest that enhanced corporate governance is negatively related to risk. Using a sample of financial institutions, Chen, Steiner and Whyte (1998) find a negative relation between managerial ownership and all three risk measures, while Bagnani, Milonas, Saunders and Travlos (1994) report that total risk, as measured by bond return premiums, is lower with managerial ownership in excess of 25%. Bhojraj and Sengupta (2003) find that firms with larger institutional ownership and a greater percentage of outside directors have higher bond ratings and lower yields.…”