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Do foreign institutional shareholders affect international debt contracting? Evidence from Yankee bond covenants

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Abstract

The international bond market is the largest component of the international capital markets. Previous research shows that the liability of foreignness (LOF) imposes significant costs on international debt contracting. The purpose of this study is to examine the impact of foreign institutional shareholders (FISs) on the costs of international debt contracting. While the presence of FISs could lead to a reduction in LOF-related costs, it can also lead to an increase in the costs arising from agency conflicts between shareholders and bondholders. We examine the impact of FISs on the prevalence of restrictive bond covenants using a sample of 956 Yankee bonds from 26 countries over the period 2001–2019. We find a significantly negative relationship between FIS ownership and bond covenants. This inverse relationship is strongest for U.S. institutional ownership, and for covenants designed to mitigate opportunistic behavior such as claim dilution and wealth transfers. We also show that the inverse relationship between U.S. institutional ownership and bond covenants is moderated by variables related to corporate governance, information asymmetry, and agency costs of debt. Additional analyses show that U.S. institutional ownership has a significant pricing effect on Yankee bond investors by lowering an issuer’s cost of borrowing.

Résumé

Le marché obligataire international est le composant le plus important du marché international des capitaux. Des recherches antérieures démontrent que les handicaps et les coûts liés au statut étranger de l’organisme (Liability of Foreignness-LOF) imposent des coûts significatifs aux contrats de dette internationale. Cette recherche vise à examiner l'impact des actionnaires institutionnels étrangers (Foreign Institutional Shareholders - FISs) sur les coûts des contrats de dette internationale. Si la présence des FISs peut conduire à une réduction des coûts liés aux LOFs, elle peut également entraîner une augmentation des coûts liés aux conflits d'agence entre les actionnaires et les détenteurs d'obligations. Nous examinons l'impact des FISs sur la prévalence des clauses restrictives des obligations en utilisant un échantillon de 956 obligations Yankee de 26 pays sur la période 2001–2019. Nous observons une relation négative significative entre la propriété des FIS et les clauses restrictives des obligations. Cette relation inverse est la plus forte pour la propriété institutionnelle américaine des obligations Yankee et pour les clauses conçues pour atténuer des comportements opportunistes tels que la dilution des créances et les transferts de richesse. Nous montrons également que la relation inverse entre la propriété institutionnelle américaine et les clauses restrictives des obligations est modérée par les variables liées à la gouvernance d'entreprise, à l'asymétrie d’information et aux coûts d'agence de la dette. Des analyses complémentaires indiquent que la propriété institutionnelle américaine exerce un impact significatif sur la fixation des prix pour les investisseurs obligataires Yankee en réduisant le coût d'emprunt de l'émetteur.

Resumen

El mercado internacional de bonos es el componente más grande del mercado internacional de capitales. La investigación anterior muestra que la desventaja de extranjería (LOF por sus iniciales en inglés) impone costos significativos en la contratación internacional de deuda. El propósito de este estudio es examinar el impacto de los accionistas institucionales extranjeros (FISs por sus iniciales en inglés) en el costo de la contratación de la deuda. Mientras que la presencia de accionistas institucionales extranjeros puede llevar a una reducción en los costos relacionados con la desventaja de extranjería, también puede llevar a aumentar los costos que surgen de los conflictos de agencia entre los accionistas y los tenedores de bonos. Examinamos el impacto de los accionistas institucionales extranjeros en la prevalencia de cláusulas de restricción de bonos utilizando una muestra de 956 bonos Yankee de26 países en el periodo 2001–2019. Encontramos una relación significativamente negativa entre la propiedad de los accionistas institucionales extranjeros y la prevalencia de cláusulas de bonos. Esta relación inversa es más fuerte en propiedad institucional de los Estados Unidos de bonos Yankee, y para cláusulas diseñadas para mitigar el comportamiento oportunista como los alegatos de dilución y transferencia de riqueza. También mostramos que la relación inversa entre la propiedad institucional de los Estados Unidos está moderada por variables relacionadas al gobierno corporativo, la asimetría de información y los costos de agencia de la deuda. Adicionalmente el análisis muestra que la propiedad institucional estadounidense tiene un efecto significativo en el precio para los inversionistas de bonos Yankee al disminuir el costo de la deuda para los emisores.

Resumo

O mercado internacional de títulos de débito é o maior componente do mercado internacional de capitais. Pesquisas anteriores mostram que a desvantagem de ser estrangeiro (LOF) impõe custos significativos na contratação de dívida internacional. O objetivo deste estudo é examinar o impacto dos acionistas institucionais estrangeiros (FIS) nos custos da contratação de dívida internacional. Embora a presença de FIS possa levar a uma redução dos custos relacionados com a LOF, ela também pode levar a um aumento dos custos decorrentes de conflitos de agência entre acionistas e detentores de títulos. Examinamos o impacto de FIS na prevalência de cláusulas restritivas de títulos de débito usando uma amostra de 956 títulos ianques de 26 países durante o período 2001–2019. Encontramos uma relação significativamente negativa entre a propriedade de FIS e acordos de obrigações. Esta relação inversa é mais forte para a propriedade institucional dos EUA em obrigações Yanques e para acordos concebidos para mitigar comportamentos oportunistas, tais como diluição de créditos e transferências de riqueza. Mostramos também que a relação inversa entre a propriedade institucional dos EUA e acordos de obrigações é moderada por variáveis relacionadas com governança corporativa, assimetria de informação e os custos de agência da dívida. Análises adicionais mostram que a propriedade institucional dos EUA tem um efeito significativo nos preços dos investidores em obrigações Yankee, ao reduzir o custo do empréstimo do emitente.

摘要

国际债券市场是国际资本市场的最大组成部分。先前的研究表明, 外来者劣势 (LOF) 给国际债务契约带来巨大成本。本研究的目的是考察外国机构股东 (FIS) 对国际债务契约成本的影响。虽然FIS的存在可能导致LOF相关成本的降低, 但也可能导致股东和债券持有者之间的代理冲突所造成的成本的增加。我们使用2001–2009年间来自26个国家的956只洋基债券样本, 研究了FIS对限制性债券契约普遍性的影响。我们发现FIS所有权与债券契约之间存在显著的负相关关系。这种反向关系对美国洋基债券机构所有权以及对旨在缓解机会主义行为 (如索赔稀释和财富转移) 的契约来说最为强烈。我们还表明, 美国机构所有权和债券契约之间的反向关系受到与公司治理、信息不对称和债务代理成本相关的变量的调节。附加分析表明, 美国机构所有权通过降低发行人的借贷成本, 对洋基债券投资者产生了显著的定价影响。

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Notes

  1. Kim et al.’s (2019) use of the acronym FII (foreign institutional investor) corresponds to our FIS (foreign institutional shareholder). We use FIS to specify that our sample of foreign investors holds equity, as opposed to debt, positions.

  2. Li and Lou (2022) find that an FIS-induced reduction in asymmetric information increases foreign bankers’ demand for covenants on syndicated loans. They argue that well-informed FISs are likely to share borrower information with foreign bankers, who are then more likely to use lender monitoring mechanisms such as covenants when constructing syndicated loans. While our study focuses on public information flows between FISs and Yankee bondholders, Li and Lou’s (2022) study focuses on private information flows between FISs and private banks. Since private bank loan monitoring is significantly different from public bond market monitoring (Altman et al., 2010), particularly in terms of informational efficiency, the relationship between FIS ownership and the demand for Yankee bond covenants is an open empirical question.

  3. “Online Appendix A” provides additional background for this theoretical framework, including brief literature reviews of Capital Market Liability of Foreignness (CMLOF), the role of Foreign Institutional Shareholders (FISs), and the use of restrictive covenants in debt contracting.

  4. This argument is consistent with Nikolaev’s (2010) findings. He documents that the relationship between covenants in public debt contracts and accounting conservatism (i.e., recognizing economic losses in earnings in a timely fashion) weakens with a company’s greater reliance on private lenders such as banks, which have strong incentives and abilities to collect information and engage in monitoring.

  5. The idea behind opportunism resistance is that entrenched managers can impede shareholder opportunism, thereby benefitting bondholders (Chava et al., 2010). For example, they show that entrenchment naturally leads to fewer covenants related to the use of large dividend payouts and leverage-increasing takeovers because entrenched managers value cash holdings.

  6. In addition to this effect, higher FIS ownership may at the same time reduce the use of covenants (Hypothesis 1). All else equal, this will increase borrowing costs (i.e., an indirect effect). Building on the reasoning in Brockman et al. (2022), the presence of FISs directly reduces debt costs by decreasing agency and asymmetric information problems, but it can also reduce the use of covenants and indirectly increase borrowing costs. The resulting net effect is an open empirical question.

  7. Ferreira and Matos (2008) provide more details on this database.

  8. Consistent with Ferreira and Matos (2008) and Bena et al. (2017), we set the institutional ownership variables to zero if a stock is not owned by any institution.

  9. We use Orthogonalized Rating as a control following Brockman et al. (2022). Our main results are robust to using raw bond rating as a control.

  10. The coefficient on IO_Domestic is positive and statistically significant (coefficient = 0.618, p value = 0.01). Although unexpected, this result could be consistent with the notion that U.S. investors perceive foreign bond issuers with large institutional ownership from their domestic countries as exhibiting less expertise and managerial independence.

  11. In a robustness test (not reported), rather than using our composite index, we include all eight individual variables that measure differences between the U.S. and the bond issuer’s country of origin (see “Online Appendix B”) in separate models as explanatory variables. The estimated coefficient on the interaction between U.S. institutional ownership and the individual LOF components is negative and statistically significant at the 5% level in all models (with only one exception, the legal environment variable, showing statistical significance at the 10% level).

  12. Accounting conservatism yields gains in contract efficiency due to better accounting quality and lower information asymmetry. In particular, as shown by Nikolaev (2010), there is a strong association between the efficiency of bond covenants and accounting conservatism. Therefore, similar to discretionary accruals, conservatism can be another substitution variable in our analysis.

  13. For the sake of brevity, all results in this section are unreported, but available upon request.

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Authors and Affiliations

  1. College of Business and Economics, Lehigh University, 621 Taylor Street, Bethlehem, PA, 18015, USA

    Paul Brockman

  2. Faculty of Business Administration, University of Hamburg, Moorweidenstrasse 18, 20148, Hamburg, Germany

    Wolfgang Drobetz

  3. Campus Saint-Jean, University of Alberta, 8406 Rue Marie-Anne-Gaboury (91 St NW), Edmonton, AB, T6C 4G9, Canada

    Sadok El Ghoul

  4. Moore School of Business, University of South Carolina, 1014 Greene Street, Columbia, SC, 29208, USA

    Omrane Guedhami

  5. College of Business, Bryant University, 1150 Douglas Pike, Smithfield, RI, 02917, USA

    Ying Zheng

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  1. Paul Brockman
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  2. Wolfgang Drobetz
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Correspondence to Paul Brockman.

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Brockman, P., Drobetz, W., El Ghoul, S. et al. Do foreign institutional shareholders affect international debt contracting? Evidence from Yankee bond covenants. J Int Bus Stud (2024). https://doi.org/10.1057/s41267-023-00667-2

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