Natalia Reisel

Do Country-level Investor Protections Impact Security-level Contract Design? Evidence from Foreign Bond Covenants

Better legal protection of investors in a country is a central theme of international corporate governance research. However, investor protections can be derived not only from legal rights provided by countries’ laws but also from rights attached to individual securities at the issuer’s discretion. Using a cross-country sample of restrictive covenants attached to public corporate bonds, we show that countries’ legal investor protections impact security level contract design. When the legal protection of investors in a country is weak, investors are more likely to require security level protections that limit potentially opportunistic actions of managers. The findings suggest that sophisticated issuers and investors can create international contracts that adapt to weak legal institutions and therefore add to our understanding of how the overall investor protection environment is formed.

Capital Allocation by Public and Private Firms

We compare investment policies across public and private firms in different institutional settings. Using a large cross-country data set, we find that public listed firms are better positioned to take advantage of growth opportunities than private firms. Specifically, public listed firms exhibit higher investment sensitivity to growth opportunities than private firms. This differential, however, only exists in countries with well-developed stock markets. Furthermore, the relative advantage public firms have at allocating capital depends on the degree of agency costs and reliance on external equity.

Senior and Subordinated Issues, Bond Ratings and the Market Price of Debt

Rating agencies such as Moodys or S&P rate subordinated bonds by notching them down from senior bonds. If notching were accurate, then we should find that all equally rated bonds are priced the same (same yield), perhaps with some random errors. However, we find that the market systematically prices differentially bonds of identical ratings but different seniority. Specifically, we find that yields of speculative senior bonds are higher than the yields of similarly rated subordinated bonds. We provide a conceptual model based upon market frictions which incorporates these findings and the finding that highly rated firms issue very few subordinated bonds.

Explaining Top Management Turnover in Private Corporations: The Role of Cross-Country Legal Institutions and Capital Market Forces

We find that the strength of countries’ legal institutions can explain the ability of private firms to identify and terminate poorly performing managers. This finding is consistent with our hypothesis that governance problems in private firms are ameliorated by strong institutions that reduce the incentives of controllers of private firms to retain poorly performing managers. Comparing private firms to their public counterparts, we find that private firms have a lower propensity to replace poorly performing managers than public firms do and that public firms’ exposure to capital market forces (the market for corporate control and stock market scrutiny) explains this difference. Overall, our findings support theoretical predictions that minority shareholders in privately held corporations might be especially vulnerable to expropriation and suggest that capital market forces play an important role in limiting managerial entrenchment.

Why Are Firms Sold? Evidence from Acquisitions of European Private Firms

We examine motives to sell private firms and provide insights into the sources of value creation from acquisitions of private targets. Using a novel dataset, we document that less profitable, highly leveraged private firms that tend to underinvest are likely to be sold. Further, these firms experience a high level of top management turnover around the period of the acquisitions and this turnover is sensitive to poor firm performance. Additionally, we find significant improvement in firm performance such as profitability and sales growth following the acquisitions. These firms also adjust their capital structure towards lower leverage. By and large, our results suggest that sales of private firms facilitate the transition of assets to a more efficient use.

Differences in Corporate Governance between Public and Private Firms: Evidence from Top Management Turnover

We find that the strength of countries’ legal institutions can explain the ability of private firms to identify and terminate poorly performing managers. This finding is consistent with our hypothesis that governance problems in private firms are ameliorated by strong institutions that reduce the incentives of controllers of private firms to retain poorly performing managers. Comparing private firms to their public counterparts, we find that private firms have a lower propensity to replace poorly performing managers than public firms do and that public firms’ exposure to capital market forces (the market for corporate control and stock market scrutiny) explains this difference. Overall, our findings support theoretical predictions that minority shareholders in privately held corporations might be especially vulnerable to expropriation and suggest that capital market forces play an important role in limiting managerial entrenchment.

Governance Problems in Privately Held Corporations: Cross-Country Evidence from Top Management Turnover

We find that the strength of countries’ legal institutions can explain the ability of private firms to identify and terminate poorly performing managers. This finding is consistent with our hypothesis that governance problems in private firms are ameliorated by strong institutions that reduce the incentives of controllers of private firms to retain poorly performing managers. Comparing private firms to their public counterparts, we find that private firms have a lower propensity to replace poorly performing managers than public firms do and that public firms’ exposure to capital market forces (the market for corporate control and stock market scrutiny) explains this difference. Overall, our findings support theoretical predictions that minority shareholders in privately held corporations might be especially vulnerable to expropriation and suggest that capital market forces play an important role in limiting managerial entrenchment.

Vive La Petite Difference - Debt Rating Policy and Yield Differentials between Senior and Subordinated Debt

Corporations seem to issue much more senior than subordinated debt and ratings agencies seem to treat these two types of bonds very differently. We document and explore these differences between senior and subordinated debt. Unlike previous work which focused on rating changes, this paper considers bond ratings at issue. Agencies such as Moodys or S&P rate subordinated bonds by notching them down from senior bonds. We document the market pricing of both senior and subordinated issues. If notching policies were done properly, then we should find that all equally rated bonds should be priced equally (same yield). However, we find that the market systematically prices differently bonds of identical ratings but different seniority. Specifically, we find that yields of speculative senior bonds are higher than the yields of similarly rated subordinated bonds. The sign reverses in most cases for investment grade issues. We provide a conceptual model based upon market frictions which incorporates all our empirical findings.