An empirical analysis of the determinants and pricing of corporate bond clawbacks

Daniels, Kenneth N.; Ejara, Demissew Diro; Vijayakumar, Jayaraman

doi:10.1016/j.jcorpfin.2009.03.003

Cited by 16 publications

(10 citation statements)

References 18 publications

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“…These selection procedures leave a total sample of 5,776 bonds consisting of 2,748 ordinary callable (hereafter callable) and 3,028 noncallable bonds. We note that this sample size is comparable to other recent studies investigating bonds using the FISD including Daniels, Diro Ejara, and Vijayakumar (), 6,978 bonds; Banko and Zhou (), 2,109 bonds; and Nayar and Stock (), 336 bonds. Table 2 reports the details of the callable and noncallable bond subsamples.…”

Section: Data Selectionsupporting

confidence: 81%

“…We note that convertible bonds can be used to deal with agency problems, and in fact Daniels, Diro Ejara, and Vijayakumar () find evidence to support this assertion. Other types of call features such as make‐whole and clawback are studied by Goyal, Gollapudi, and Ogden (), Powers and Sarkar (), Nayar and Stock (), and Daniels, Diro Ejara, and Vijayakumar (). We are interested in whether ordinary call features are related to changes in economic circumstances and we have nothing to add concerning the use of convertible, make‐whole, or clawback bonds.…”

Section: Data Selectionmentioning

confidence: 64%

“…This article is related to a series of studies that examine the motivation and offer spreads of different types of callable bonds. Daniels, Diro Ejara, and Vijayakumar () examine the motivation and offer spreads of bond clawbacks, and Nayar and Stock () study make‐whole bonds. Clawbacks and make‐whole bonds are special types of callable bonds that restrict the refunding of callable bonds to issues of equity (clawbacks) or adjusts the call price at the date of call (make‐whole).…”

Section: Introductionmentioning

confidence: 99%

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The Choice Between Callable and Noncallable Bonds

Booth¹,

Gounopoulos

Skinner

2014

J of Financial Research

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We examine the choice and the offer spreads between callable and noncallable bonds. We find significant differences by industry sector and therefore segment our results by financial and nonfinancial industries. For the financial sector, the popularity of callable and noncallable bonds is significantly related to the economic environment. Financial and high-grade nonfinancial callable bonds are also more likely to be issued via a shelf prospectus. Although firms that issue callable bonds do not consistently display the characteristics associated with severe agency problems, the issue choice for belowinvestment-grade nonfinancial and lower rated financial bonds, where we can expect agency problems to be more severe, is more consistent with agency theory than is the issue choice for higher rated bonds. characteristics associated with agency problems? Finally, do issuers pay a premium for the call feature?This article is related to a series of studies that examine the motivation and offer spreads of different types of callable bonds. Daniels, Diro Ejara, and Vijayakumar (2009) examine the motivation and offer spreads of bond clawbacks, and Nayar and Stock (2008) study make-whole bonds. Clawbacks and make-whole bonds are special types of callable bonds that restrict the refunding of callable bonds to issues of equity (clawbacks) or adjusts the call price at the date of call (make-whole). Banko and Zhou (2010) revisit the agency theoretic explanations for callable bonds, and Chen, Mao, and Wang (2010) examine the refunding behavior of callable bonds. We add to this body of work by examining the time-varying popularity of ordinary callable bonds and the influence that the issue process, bond covenants, and economic environment have on the offer spread for callable and noncallable bonds and on the value of call premiums. Unlike most studies in this area, we include financial firms as a larger number of callable bonds are issued by financial firms than by industrial and utility bonds combined during our 1995-2008 sample period. We also include financial bonds in our sample because we wish to determine whether the financing of financial firms is subject to the same agency theoretic problems as industrial firms.Other work includes the influence of the economic environment on the popularity of callable bonds, but evidence is fragmentary and contradictory. For example, Kish and Livingston (1992), Güntay, Prabhala, and Unal (2002), and Banko and Zhou (2010) find that the popularity is increasing, but Sarkar (2001) finds that the popularity of a call feature is decreasing in the level of interest rates. However, all of this work occurs during the time the call feature was being reengineered through the introduction of make-whole and clawback refinements to the call feature (see Goyal, Gollapudi, and Ogden 1998;Nayar and Stock 2008). Moreover, none of this work accounts for the full range of interest rate and credit risk environment variables. In contrast, we examine the impact of the economic environment by including proxies fo...

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Section: Data Selectionsupporting

confidence: 81%

Section: Data Selectionmentioning

confidence: 64%

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

The Choice Between Callable and Noncallable Bonds

Booth¹,

Gounopoulos

Skinner

2014

J of Financial Research

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“…We control for callable bonds (using the variable callable) (Livingston and Miller 2000), first-time issuer status (Gande et al 1999), the BofA/Merrill Lynch high-yield (HY) index spread over 10-year Treasuries (Fridson and Garman 1998), bond maturity (Helwege and Turner 1999), subordinated bonds 17 (John et al 2010), treasury spread, defined as the yield differential of 10-year to 3-month U.S. Treasuries on the date of bond issue (Fridson and Garman 1998), and zero or step-up coupon bonds (Fenn 2000). We also control for the following, to date little researched, variables: equity clawback provisions (Goyal et al 1998, Daniels et al 2009), leveraged buyouts (LBOs), 18 and SEC Rule 144A issues (Fenn 2000, 17 Guedhami and Pittman (2008) and John et al (2010) argue that evidence that subordinated bonds exhibit lower initial yield spreads relative to senior bonds with similar credit ratings reflects Moody's and Standard & Poor's rating policy of generally notching down subordinated bonds by two (S&P) or even three (Moody's) notches relative to senior bonds. Market disagreement regarding this practice can result in a correction being reflected in the initial yield spread.…”

Section: Nyse/amex Listingmentioning

confidence: 99%

Underwriter Reputation and the Quality of Certification: Evidence from High-Yield Bonds

2012

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper provides primary evidence of whether certification via reputable underwriters is beneficial to investors in the corporate bond market. We focus on the high-yield bond market, in which certification of issuer quality is most valuable to investors owing to low liquidity and issuing firms' high opacity and default risk. We find bonds underwritten by the most reputable underwriters to be associated with significantly higher downgrade and default risk. Investors seem to be aware of this relation, as we further find the private information conveyed via the issuer-reputable underwriter match to have a significantly positive effect on at-issue yield spreads. Our results are consistent with the market-power hypothesis, and contradict the traditional certification hypothesis and underlying reputation mechanism.JEL classification: G11, G14, G24

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“…This article is related to a series of studies that examine the motivation and offer spreads of different types of callable bonds. Daniels, Diro Ejara, and Vijayakumar (2009) examine the motivation and offer spreads of bond clawbacks, and Nayar and Stock (2008) study make-whole bonds. Clawbacks and make-whole bonds are special types of callable bonds that restrict the refunding of callable bonds to issues of equity (clawbacks) or adjusts the call price at the date of call (make-whole).…”

Section: Introductionmentioning

confidence: 99%