Debt enforcement and the cost of debt financing in M&As

Abstract

We examine whether the debt enforcement affects the cost of debt securities in M&A transactions in 28 countries. Strong enforcement lowers the yield of securities. We show that legal enforcement affects the offering yield through the priority rule for creditors, which means senior debt creditors are paid in full first. The offering yield is higher for a security when a higher proportion of subordinated debts is used in an M&A transaction. However, strong enforcement improves a lender's chance of being paid back even for subordinated debt, so the offering yield is lower for subordinated debt in countries with better enforcement.