Designing a Governance Structure for Corporate Bonds in Korea : Empirical Stucy on Corporate Bond Indentures

Abstract

In this paper, we studied the impact of corporate bond indenture on bondholder protection system. First, we studied the effectiveness of corporate bond indenture in protecting bondholders by examining some institutional data such as the dispersion of bond holdings, independence of indenture trustees, and indenture trustee fees. Various institutional data imply that bond indentures were treated as a formality in Korean bond markets. Second, we compared the cost of debt before and after the Standard Indenture. Many companies showed decreased spreads after the Standard Indenture. However, the differences were too small to reject the hypothesis that spreads are the same before and after the Standard Indenture. Finally, we studied the determinants of covenants in bond indentures. Before the Standard Indenture period, none of the variables were statistically significant at 10% significance level. However, after the Standard Indenture period, several variables such as the ownership concentration variable and the credit rating variable became statistically significant at 10% significance level. Also the R-squared improved significantly. Overall, our results imply that the efforts to reduce the agency problem by introducing the Standard Indenture had a limited impact in Korea. For better governance system in Korean bond markets, effective enforcement mechanism of bond covenants will need to be developed.