Corporate Governance, Fiduciary Duty of Boards of Directors, and Bondholders’ Wealth

Abstract

We document that strong governance from shareholders’ perspective, including a more independent and active board and large shareholdings by institutional blockholders are associated with higher bond spreads, but only when the firm’s credit condition is poor and the firm is incorporated in a state without constituencies statute that allows directors to consider stakeholders’ interest other than shareholders’. Our evidence corroborates the idea that good governance from shareholders’ perspective matters more adversely for bondholders when performance deteriorates, and fiduciary duties of the board substitute the incomplete bond covenants in resolving the agency conflict between shareholders and bondholders.