Do bondholders receive benefits from bank interventions?

Abstract

PurposeThe purpose of this study is to examine the effect of bank interventions on bond performance in relation to loan covenant violations.Design/methodology/approachThis paper tests the following questions: do bondholders receive benefits from bank interventions? Is bond performance related to the probability of bank interventions? Is the turnover of a chief executive officer (CEO) associated with bank interventions and bond performance? Abnormal bond returns, the difference between bond returns and matched bond index returns are used to measure bond performance. An estimated outstanding loan balance is used to measure the probability of bank interventions. CEO turnover is identified from proxy statements and categorized into forced and voluntary CEO turnovers. Event studies and regression analysis were used to answer the above research questions.FindingsThis paper finds that both short-term and long-term bond returns increase after covenant violations, bond performance is positively related to the probability of bank interventions, forced CEO turnovers are positively associated with the probability of bank interventions and firms with forced CEO turnovers tend to have superior bond performance.Originality/valueThis paper is the first to explore the relation between bank interventions and bond performance.