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The freeze-out bond exchange offer. An experimental approach

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  • Flavio Bazzana

    ()

  • Luigi Mittone

    ()

  • Luciano Andreozzi

    ()

Abstract

A freeze-out bond exchange offer can occur when a firm wants to replace an exist- ing bond, issued with a covenant, with a new bond that does not have this type of restriction. If the bondholders are not fully coordinated, the shareholders can make the exchange offer unfair to capture wealth from the bondholders. We perform two experiments using the freeze-out game proposed by Oldfield (2004) to isolate (i) the level of information in the exchange offer and (ii) the role of the experience of the bondholders. The results are statistically significant. In the first experiment, they show that experience is a dominant factor with respect to information. Conversely, in the second experiment, the information becomes dominant with respect to expe- rience. The percentages of the choices for the symmetric Nash equilibria are greater in the first experiment. However, in the second experiment, the choices of the asymmetric Nash equilibrium, which is Pareto superior in the game, are greater than in the first experiment. These results have policy implications that may affect exchange offers in the bond market.

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Bibliographic Info

Paper provided by Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia in its series CEEL Working Papers with number 1204.

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Date of creation: 2012
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Handle: RePEc:trn:utwpce:1204

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Keywords: freeze-out; covenant; bond; experimental finance;

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References

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  1. Yakov Amihud & Kenneth Garbade & Marcel Kahan, 2000. "An Institutional Innovation To Reduce The Agency Costs Of Public Corporate Bonds," Journal of Applied Corporate Finance, Morgan Stanley, vol. 13(1), pages 114-121.
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  3. Sweeney, Amy Patricia, 1994. "Debt-covenant violations and managers' accounting responses," Journal of Accounting and Economics, Elsevier, vol. 17(3), pages 281-308, May.
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  7. Paul Mather & Graham Peirson, 2006. "Financial covenants in the markets for public and private debt," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 46(2), pages 285-307.
  8. de Jong, Abe & Roosenboom, Peter & Schramade, Willem, 2009. "Who benefits from bond tender offers in Europe?," Journal of Multinational Financial Management, Elsevier, vol. 19(5), pages 355-369, December.
  9. HEGE, Ulrich & MELLA-BARRAL, Pierre, 2002. "Repeated dilution of diffusely held debt," Les Cahiers de Recherche 751, HEC Paris.
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  12. Flavio Bazzana & Marco Palmieri, 2012. "How to increase the efficiency of bond covenants: a proposal for the Italian corporate market," European Journal of Law and Economics, Springer, vol. 34(2), pages 327-346, October.
  13. Daniels, Kenneth & Ramirez, Gabriel G., 2007. "Debt restructurings, holdouts, and exit consents," Journal of Financial Stability, Elsevier, vol. 3(1), pages 1-17, April.
  14. Bates, Thomas W. & Lemmon, Michael L. & Linck, James S., 2006. "Shareholder wealth effects and bid negotiation in freeze-out deals: Are minority shareholders left out in the cold?," Journal of Financial Economics, Elsevier, vol. 81(3), pages 681-708, September.
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Cited by:
  1. Bazzana Flavio & Broccardo Eleonora, 2013. "The role of bondholder coordination in freeze-out exchange offers," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 51-65, January.

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