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The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence

Author

Listed:
  • Kenneth Daniels

    (School of Business, Virginia Commonwealth University)

  • Fernando Díaz

    (Facultad de Economía y Empresa, Universidad Diego Portales)

  • Gabriel Ramírez

    (Coles College of Business, Kennesaw State University)

Abstract

Clawback provisions allow the issuer to partially redeem a bond issue often within three years of issuance using proceeds only from new equity issues. Empirical evidence indicates the clawback provision is rarely exercised. This poses an interesting dilemma as clawback provisions are an expensive source of funding, often commanding yields that are significantly higher than traditional corporate bonds. We develop a simple model that provides a rationale for the scarcity of call redemptions and the higher yields of clawback bonds. The model predicts a relation between issuance of clawback bonds, cash flow volatility and the probability of renegotiation of clawback debt contracts.

Suggested Citation

  • Kenneth Daniels & Fernando Díaz & Gabriel Ramírez, 2011. "The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence," Working Papers 28, Facultad de Economía y Empresa, Universidad Diego Portales.
    • Handle: RePEc:ptl:wpaper:28
    as

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    References listed on IDEAS

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    Cited by:

    1. Daniels, Kenneth N. & Hurtado, Fernando Díaz & Ramírez, Gabriel G., 2013. "An empirical investigation of corporate bond clawbacks (IPOCs): Debt renegotiation versus exercising the clawback option," Journal of Corporate Finance, Elsevier, vol. 20(C), pages 14-21.

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