Empirical Corporate Finance
Session Chair: Gabriele Lattanzio, University of Melbourne
Poison Bonds
Rex Renjie; Vrije Universiteit Amsterdam (VU)
Shuo Xia; Halle Institute for Economics Research
This paper documents the rise of “poison bonds”, which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% after 2005. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Further analyses suggest that this practice entrenches incumbent managers, coincidentally benefits bondholders, but destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of -7.3% per year. Our findings have important implications for understanding the agency benefits and costs of debt: (1) more debt does not necessarily discipline the management; and (2) even without financial distress, managerial entrenchment can lead to conflicts between shareholders and creditors.
Discussant: Tom Griffin, Villanova University
Environmental Pollution and Business Activity: Evidence From Toxic Chemical Spills
George Tian; University of Houston
Buvaneshwaran Venugopal; University of Central Florida
Vijay Yerramilli; University of Houston
We use major toxic chemical spills as pollution shocks to their local neighborhoods and examine the consequent effects on local business activity. A key finding is that pollution shocks contribute to increases in business concentration in their local economy because of their disproportionate adverse effect on smaller establishments which works to the advantage of larger establishments. Specifically, in every sector, establishments in the smallest size quartile experience significant increases in the likelihood of exit, a large reduction in sales, and a modest reduction in employment following exposure to major spills, whereas those in the largest size quartile actually experience increases in sales and employment, and do not face an increased likelihood of exit. We identify two likely explanations for these persistent adverse effects on local business activity: worsening of credit frictions and migration of population and income away from counties exposed to major toxic chemical spills.
Discussant: Ekaterina Volkova, University of Melbourne