Creditor protection laws and the cost of debt
Mansi, Sattar A.
Creditor protection laws and the cost of debt by Sattar A. Mansi, William F. Maxwell and John K. Wald - Journal of law and economics Volume 52, number 4 .
We examine the impact of state payout restrictions on firms' credit ratings and bond yields. Using publicly traded bond data for a sample of large firms, we find that firms incorporated in states with more restrictive payout statutes (for example, New York and California) have better credit ratings and significantly lower yield spreads (about 8.7 percent) than do firms incorporated in less restrictive states (for example, Delaware). These results suggest that incorporation in a more restrictive state provides a credible commitment mechanism for avoiding some of the moral hazard problems associated with long‐term debt. This commitment corresponds to an economically and statistically significant difference in market yields and firm‐financing costs and is robust to controls for ownership, governance, debt type, Delaware or non‐Delaware incorporation, and covenant usage. Overall, our results are consistent with the notion that Delaware incorporation has hidden costs for some firms
00222186
Business structures--Credit ratings
Debt--Debt financing
Financial leverage--Incorporation
Outstanding debt--State law
HB73 JOU
Creditor protection laws and the cost of debt by Sattar A. Mansi, William F. Maxwell and John K. Wald - Journal of law and economics Volume 52, number 4 .
We examine the impact of state payout restrictions on firms' credit ratings and bond yields. Using publicly traded bond data for a sample of large firms, we find that firms incorporated in states with more restrictive payout statutes (for example, New York and California) have better credit ratings and significantly lower yield spreads (about 8.7 percent) than do firms incorporated in less restrictive states (for example, Delaware). These results suggest that incorporation in a more restrictive state provides a credible commitment mechanism for avoiding some of the moral hazard problems associated with long‐term debt. This commitment corresponds to an economically and statistically significant difference in market yields and firm‐financing costs and is robust to controls for ownership, governance, debt type, Delaware or non‐Delaware incorporation, and covenant usage. Overall, our results are consistent with the notion that Delaware incorporation has hidden costs for some firms
00222186
Business structures--Credit ratings
Debt--Debt financing
Financial leverage--Incorporation
Outstanding debt--State law
HB73 JOU