Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information

Koziol, Christian; Lawrenz, Jochen

doi:10.1016/j.jcorpfin.2009.12.002

Journal of Corporate Finance

2010

DOI: 10.1016/j.jcorpfin.2009.12.002

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Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information

Christian Koziol

Jochen Lawrenz

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Cited by 26 publications

References 38 publications

(45 reference statements)

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Loan-commitment borrowing and performance-sensitive debt

Sarkar

Zhang

2015

Rev Quant Finan Acc

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This paper examines a firm's investment/financing decision when it uses loancommitment-type debt with performance-sensitivity features. This analysis is of interest because most corporate borrowing today is by means of private debt, which tends to be of the loan-commitment type as well as contain performance-sensitivity provisions. We show that, except for the case of low leverage ratio, performance-sensitive debt makes shareholders better off relative to fixed-coupon debt. In particular, when the leverage ratio is chosen optimally, performance-sensitive debt dominates fixed-coupon debt and the resulting addition to shareholder wealth can be economically significant for reasonable parameter values. Therefore, it is not surprising that performance-sensitive debt has become so popular in the private debt market. The magnitude of shareholder wealth created by using performance-sensitive debt rather than fixed-coupon debt is an increasing function of earnings growth rate and tax rate, and a decreasing function of interest rate, earnings volatility and bankruptcy cost. Therefore, performance-sensitive debt financing is more likely to be used when earnings growth rate and tax rate are high, and interest rate, earnings volatility and bankruptcy cost are low.

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Loan-commitment borrowing and performance-sensitive debt

Sarkar

Zhang

2015

Rev Quant Finan Acc

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A sequential pricing framework for corporate securities: The case of rating-trigger step-up/-down bonds

Bank

Kupfer

2014

Finance Research Letters

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Cash management and risk-taking incentives with performance-sensitive debt under stochastic financing conditions

Yao

Luo²

2022

Finance Research Letters

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Optimal design of rating-trigger step-up bonds: Agency conflicts versus asymmetric information

Cited by 26 publications

References 38 publications

Loan-commitment borrowing and performance-sensitive debt

Loan-commitment borrowing and performance-sensitive debt

A sequential pricing framework for corporate securities: The case of rating-trigger step-up/-down bonds

Cash management and risk-taking incentives with performance-sensitive debt under stochastic financing conditions

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