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Does the choice between fixed price and make whole call provisions reflect differential agency costs?

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  • Alderson, Michael J.
  • Lin, Fang
  • Stock, Duane R.

Abstract

Bonds with either fixed price or make whole call provisions allow for the efficient recontracting of claims, but they differ in terms of their ability to mitigate debt agency costs. Controlling for the influence of bondholder-shareholder conflicts on both the level of covenant protection and selection of a particular type of call provision, we show that firms select call provisions with greater sensitivity to changes in the option-free value of the bond when agency problems are more severe. Our findings are consistent with the Barnea, Haugen and Senbet (1980) theorem that firms select fixed price callable debt to mitigate bondholder-shareholder conflicts.

Suggested Citation

  • Alderson, Michael J. & Lin, Fang & Stock, Duane R., 2017. "Does the choice between fixed price and make whole call provisions reflect differential agency costs?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 442-460.
    • Handle: RePEc:eee:corfin:v:46:y:2017:i:c:p:442-460
    DOI: 10.1016/j.jcorpfin.2017.08.007
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    Cited by:

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    2. Afik, Zvika & Jacoby, Gady & Stangeland, David & Wu, Zhenyu, 2019. "The make-whole and Canada-call provisions: A case of cross-country spillover of financial innovation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 120-127.
    3. Brown, Scott & Powers, Eric, 2020. "The life cycle of make-whole call provisions," Journal of Corporate Finance, Elsevier, vol. 65(C).
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    5. Liang‐Chih Liu & Tian‐Shyr Dai & Lei Zhou & Hao‐Han Chang, 2022. "Analyzing interactive call, default, and conversion policies for corporate bonds," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1597-1638, August.

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    More about this item

    Keywords

    Fixed price call provision; Make whole call provision; Debt agency costs; Restrictive covenants;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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