In this study, we empirically investigate the relation between corporate finance and fixed income securities. Specifically, we employ... Show moreIn this study, we empirically investigate the relation between corporate finance and fixed income securities. Specifically, we employ staggered changes in state corporate income tax rates as exogenous shocks and estimate how these state tax changes affect bond at-issue yield spreads. We find a significant increase in bond yield spreads after state tax increases but not after state tax decrease. Tax increases result in a 36 basis points increase in the yield spreads, which translates into a $12 million increase in interest expenses for firms experiencing tax increases. Besides, we employ the staggered adoption of universal demand (UD) laws by different states in the United States as a quasi-experimental setting and investigate the effect of UD laws on bond yield spreads at issuance. The adoption of UD laws raises the hurdle for shareholders to bring derivate lawsuits against firms and weakens shareholder litigation rights. Using a sample of bond issuances from 1985 to 2009, we find that the adoption of UD laws is positively associated with yield spreads of bonds issued by U.S. firms. Show less
