Insider ownership, governance, and corporate bond pricing

Working paper (updated 2021)
Corporate Governance & Sustainability

We investigate the effect of insider ownership on corporate bond yield spreads from 2003 to 2014 using a sample of 10,460 bonds issued by 1,222 non-financial firms from 44 countries. Using this sample, we find on average that greater insider ownership is associated with a higher yield spread. We consider consumption of private benefits as an economic channel through which insider ownership hurts bondholders. Using a global index of shareholder rights, we observe that the positive association between insider ownership and the spread decreases for firms with relatively stronger shareholder rights in which consumption of private benefits is less likely to occur. Furthermore, we report that in firms with more insider ownership the probability of related-party transactions is larger whereas their accounting return on assets is weaker, ceteris paribus. Taken together, the results indicate that bondholders anticipate that greater insider ownership facilitates consumption of private benefits, with implications for the valuation of corporate debt.



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