How do bond trustee affect corporate borrowing?
Dr. QI Yaxuan
Department of Economics and Finance
College of Business
City University of Hong Kong
In U.S. bond markets, publicly-issued corporate bonds are required to have a trustee as a representative of bondholders to help ensure investor rights in bond contracts. However, these trustees are hired by issuers, and often have business relation with issuers. A widely shared concern is whether trustee can efficiently and effectively act on bondholder benefit. In this paper, we provide the very first empirical study on bond trustees. We find that 50% of bond trustees are banks that have lending relationship with issuers. The existence of bank-trustees is associated with lower borrowing cost at the time of bond issuances. This evidence is consistent with the cross-monitoring hypothesis that bank trustee can more effectively monitor issuers and provide better protection to bondholders. Nevertheless, this situation that trustees hold significant lending shares may leads to conflict of interest, especially when issuers are in financial distress, because the trustee may prioritize its own interest over fiduciary duty. Therefore, we further examine the impact of bond trust on default risk and outcome of debt restructuring.
Yaxuan is an associate professor of finance at the City University of Hong Kong. She received her Ph.D. in Finance from the Rutgers University. Her research interests lie on the interdisciplinary fields of finance, law, political science and international business. Her research aims to understand how legal and political institutions shape business environment and in turn affect corporate policies, among which she especially focuses on debt financing and debt contracts. Her recent research examines how multinational firms reallocate resource across borders in response to political risk and regulations. Yaxuan has published in leading finance and business journals such as Journal of Financial Economics, Journal of Corporate Finance, Journal of International business studies, and Journal of Law and Economics. Yaxuan is an associate editor of Asia-Pacific Journal of Accounting & Economics. She is an active reviewer for a number of leading finance and business journals.
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