Abstract
In this paper we provide causal estimates in support of the hypothesis that improvements in corporate governance benefit the debtholders. By using the outcome of votes on shareholder-sponsored governance proposals at annual meetings we find that passing a proposal that increases shareholder rights reduces the firm’s default risk as measured by adjusted CDS spreads. Exploiting the discontinuity in the vote outcome around the majority threshold, we find that passing a governance proposal lowers the cumulative adjusted CDS spreads by about 6 bps in a two-day window around the voting date. We find that CDS market reaction is larger in the case of non-G-Index related provisions and for non-investment grade firms. Moreover, consistent with the short-run market reaction, the firm credit rating improves on average by about half a notch in two years after the voting, further supporting the hypothesis in the long-term.
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