Governance, Takeover Probability, and the Cost of Private Debt

Using a sample of bank loans issued to US firms from 2000-2009 we find that creditors price governance mechanisms mitigating agency costs between borrowers and stakeholders. However, creditors find acquisitions of borrowers costly, and therefore increase spreads for borrowers at greater probability of takeover. In higher states of takeover probability, creditors lower spreads to financially stronger borrowers with staunch takeover defenses. Creditors therefore price both internal and external governance mechanisms in borrowers, though whether agency or borrower acquisition costs dominate the pricing function is determined by both borrower takeover probability and borrower financial strength.