Governance Effects of Corporate Bond Market Microstructure

Abstract

I find that bond issuing entities reduce acquisition activity by approximately 22% following an exogenous increase in bond market exit threat. The treatment effect is less pronounced when an issuer is a reference entity in the CDS market and when bank monitoring is higher. The effect is more pronounced when the investment opportunities are higher, for firms with a greater short-selling threat, and for speculative-grade issuers. These findings suggest that bond market exit threat disciplines corporate risk-taking. Treatment firms do not change capital expenditures and R&D expenditures, implying that bond market disciplining is less effective when corporate risk-taking is less visible. However, treatment firms reduce shareholder payout and increase precautionary cash holdings. Collectively, the findings imply that the secondary corporate bond market influences issuing firms’ real decisions.