Critical Finance Review > Vol 7 > Issue 1

Takeover Defense Provisions, Firm Volatility, and the Cost of Corporate Loan Finance

Lewis Gaul, Policy Analysis Division, Office of the Comptroller of the Currency, USA, Lewis.Gaul@occ.treas.gov Jonathan Jones, Risk Analysis Division, Office of the Comptroller of the Currency, USA, Jonathan.Jones@occ.treas.gov Pinar Uysal, Federal Reserve Bank of Richmond, USA, Pinar.Uysal@rich.frb.org
 
Suggested Citation
Lewis Gaul, Jonathan Jones and Pinar Uysal (2018), "Takeover Defense Provisions, Firm Volatility, and the Cost of Corporate Loan Finance", Critical Finance Review: Vol. 7: No. 1, pp 165-190. http://dx.doi.org/10.1561/104.00000054

Published: 10 Jul 2018
© 2018 Lewis Gaul, Jonathan Jones and Pinar Uysal
 
Subjects
 
Keywords
G21G32G34
Corporate governanceCorporate loansAsset volatilityInstrumental variables
 

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In this article:
1. Introduction
2. Empirical Model
3. Data Description and Variables
4. Descriptive Statistics
5. Regression Results
6. A Re-Examination of the Leverage-Increasing Takeover Hypothesis
7. Conclusion
References

Abstract

Does the negative correlation between the cost of corporate loans and the G-Index of Gompers et al. (2003) uncovered by chava et al. (2009) imply that adopting anti-takeover provisions lowers the cost of debt? In this paper, we argue against such a conclusion. We present evidence that an omitted variable, firm asset volatility, can account for the statistically significant relation between the G-Index and corporate loan spreads found by chava et al. (2009). After controlling for firms’ asset volatility using estimates of equity volatility and instrumental-variable methods, we show there is no longer a robust, statistically significant relation between the G-Index and loan spreads.

DOI:10.1561/104.00000054