IDEAS home Printed from
   My bibliography  Save this article

The Impact of In-substance Defeasance on Bondholder and Shareholder Wealth


  • Johnson, James M
  • Pari, Robert A
  • Rosenthal, Leonard


This paper hypothesizes and tests the argument that a defeasance transaction initiates a wealth transfer from stockholders to bondholders. The authors empirical tests provide compelling evidence of bondholder gains, but no support for shareholder losses when a firm defeases debt. They speculate that the insignificance of the loss to shareholders is primarily due to the size disparity between the value of defeased debt and the market value of outstanding equity, since the suggested economic merits of defeasance appear unfounded. Although they cannot prove an agency motivation for defeasance, they find a very high correlation between compensation tied to earnings and defeasing debt at book gain. Copyright 1989 by American Finance Association.

Suggested Citation

  • Johnson, James M & Pari, Robert A & Rosenthal, Leonard, 1989. " The Impact of In-substance Defeasance on Bondholder and Shareholder Wealth," Journal of Finance, American Finance Association, vol. 44(4), pages 1049-1057, September.
  • Handle: RePEc:bla:jfinan:v:44:y:1989:i:4:p:1049-57

    Download full text from publisher

    File URL:
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See for details.

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Lubberink, Martien, 2014. "Are banks’ below-par own debt repurchases a cause for prudential concern?," MPRA Paper 59475, University Library of Munich, Germany.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:44:y:1989:i:4:p:1049-57. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.