Managers, Owners, and The Pricing of Risky Debt: An Empirical Analysis

Authors

  • ELIZABETH STROCK BAGNANI,

  • NIKOLAOS T. MILONAS,

  • ANTHONY SAUNDERS,

  • NICKOLAOS G. TRAVLOS

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    • Bagnani is from the Wallace E. Carroll School of Management, Boston College. Milonas is from the School of Management, University of Massachusetts Amherst, University of Athens, and the Athens LBA. Saunders is the John M. Schiff Professor of Finance at the Leonard N. Stern School of Business, New York University. Travlos is from the Wallace E. Carroll School of Management, Boston College, University of Piraeus, and the Athens LBA. We gratefully acknowledge the comments of Yakov Amihud, David Belsley, Mitch Berlin, Cliff Holderness, Kose John, Bruce Lehman, Robyn McLaughlin, Hamid Mehran, Tim Mech, Bob Taggart, Arthur Warga, two anonymous referees, and the editor, René Stulz. We thank the Federal Reserve Bank of Philadelphia for making available data on treasury securities. Milonas acknowledges support from the School of Management of the University of Massachusetts via a Summer Research Grant. Saunders acknowledges the support of a Yamaichi Fellowship. Bagnani and Travlos acknowledge financial support from the Boston College Research Council.

ABSTRACT

This article examines managerial ownership structure and return premia on corporate bonds. It is argued that when managerial ownership is low, an increase in managerial ownership increases management's incentives to increase stockholder wealth at the expense of bondholder wealth. When ownership increases more, however, it is argued that management becomes more risk averse, with incentives more closely aligned with bondholders. This study finds a positive relation between managerial ownership and bond return premia in the low to medium (5 to 25 percent) ownership range. There is also weak evidence for a nonpositive relation in the large (over 25 percent) ownership range.

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