Takeover Defense Provisions, Firm Volatility, and the Cost of Corporate Loan Finance Available to Purchase

Does the negative correlation between the cost of corporate loans and the G-Index of Gompers et al. (2003) uncovered by Chava et al. (2009) imply that adopting anti-takeover provisions lowers the cost of debt? In this paper, we argue against such a conclusion. We present evidence that an omitted variable, firm asset volatility, can account for the statistically significant relation between the G-Index and corporate loan spreads found by Chava et al. (2009). After controlling for firms’ asset volatility using estimates of equity volatility and instrumental-variable methods, we show there is no longer a robust, statistically significant relation between the G-Index and loan spreads.