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SHAREHOLDER‐MANAGEMENT CONFLICT AND EVENT RISK COVENANTS
Author(s) -
Roth Greg,
McDonald Cynthia G.
Publication year - 1999
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1999.tb00723.x
Subject(s) - shareholder , business , covenant , corporate governance , event study , event (particle physics) , accounting , monetary economics , finance , economics , law , political science , paleontology , context (archaeology) , physics , quantum mechanics , biology
Event risk covenants (ERCs), such as poison puts, can protect bondholders from losses related to highly leveraged transactions. Previous observers argue that managers could use ERCs primarily to benefit shareholders or to entrench, and the evidence on the shareholder wealth effects of ERCs is conflicting. Using data not previously exploited and an innovative method of isolating the wealth effects of ERCs, we find that ERCs decrease shareholder wealth. Additional evidence suggests that firms with greater shareholder‐management conflict are more likely to use ERCs. Overall, the evidence from this study supports the entrenchment view of ERCs.