Chapter 62. Bondholder Value versus Shareholder Value

CLAUS HUBER, CFA, FRM, PhD

Chief Risk Officer, Credaris Portolio Management

Abstract: Bondholder value can be set equal to the amount of a company's debt. Alternatively, it can be related to the credit spread, the company's rating or financial ratios. A company's value can be defined as the sum of shareholder value and the value of its debt. Therefore, both parties should have common interests in increasing shareholder value as well as bondholder value. Potential conflicts between shareholders and bondholders are caused for example by the different nature of claims on the company's cash flows: Shareholders earn the residual income after satisfying the fixed claims of the bondholders. A risky corporate strategy promising high returns conforms to shareholders' interests of a high residual income, whereas creditors only want to cover their interest claims and avoid risky investments. Other sources of conflicts of interest are for example capital structure and stock buybacks. To align the different perspectives of shareholders and bondholders, instruments like the balanced scorecard, risk management, or investor relations can be used.

Keywords: shareholder value, bondholder value, investor relations, balanced, scorecard, risk management, conflict of interest, residual claim, capital structure, dividend policy, stock buyback, corporate strategy, principal-agent conflict, rating, credit spread, weighted average cost of capital (WACC) ...

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