Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN

Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry by Wei Du, Maya Waisman, Haizhi Wang, Mingming Zhou :: SSRN:

Du, Waisman, Wang, and Zhou provide an interesting look at a topic that frankly I never considered: whether post employment non compete contracts in financial service firms are priced by market participants and whether the enforcement of these contracts is good for bondholders.



From the abstract:

"...this study examines whether and to what extent the capital markets recognize the risk associated with the mobility of human capital. We evaluate the state-by-state variations in the enforceability of noncompetition agreements in the United States to test the market-discipline hypothesis and find a significant negative relation between the degree of enforcement of noncompetition agreements and the yield spreads for bonds issued by financial institutions. We also find that the negative relation is more prominent for investment-grade bonds and bonds with long-term maturities. In addition, we find that investors care more about managerial stability when bond issuers have weak protection of shareholder rights."

From the paper:

"Noncompetition agreements can function as strong binding mechanisms that significantly increase managerial stability and reduce the mobility of human capital (Garmaise 2010). The legal enforcement of covenants not to compete varies widely across jurisdictions in the United States. For example, a majority of states allow and enforce noncompetition agreements as long as they are ―reasonable and necessary,‖ though California virtually forbids such covenants. This variation in legal enforcement provides a natural setting to apply the insights of the law and finance literature (La Porta et al. 1997, 1998). 

This paper examines whether bondholders demand different yield spreads if the legal enforcement of noncompetition agreements affects the mobility of human capital. Following existing research (Morgan and Stiroh 2001), we collect data on new bond issues from financial institutions and document that the statewide enforcement level is negatively correlated with bond spreads, which means that investors do recognize the risk associated with the mobility of human capitals and price the risk accordingly. We also find that bonds investors care more about the managerial stability of financial institutions having weak protection of shareholder rights. "

Interesting.

Cite:

Du, Wei, Waisman, Maya, Wang, Haizhi and Zhou, Mingming, Do Bondholders Care About Managerial Stability? Evidence from the Financial Services Industry (June 18, 2011). Available at SSRN: http://ssrn.com/abstract=1885752