IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Using Innovative Securities under Asymmetric Information: Why Do Some Firms Pay with Contingent Value Rights?

Listed author(s):
  • Chatterjee, Sris
  • Yan, An
Registered author(s):

    This paper provides the first theoretical explanation and the first empirical analysis of contingent value rights (CVRs), which have been used as a means of payment in acquisitions, exchange offers, debt restructurings, Chapter 11 reorganizations, and lawsuit settlements. A CVR is a put option committing to pay additional cash or securities to CVR holders, contingent on the issuer's share price falling below a prespecified reference level. In this paper, we develop a model to show that CVRs can help a higher-intrinsic-value firm to reveal its firm type when the firm faces an asymmetric information problem. Our model predicts that i) when CVRs are offered along with cash or stock, the announcement period abnormal stock return is greater than that in stock offers, ii) firms facing more severe asymmetric information problems are more likely to offer CVRs to signal their firm type, and iii) firms that are relatively more cash-constrained are more likely to offer CVRs rather than cash. We test all three predictions using a sample of mergers and acquisitions. Our empirical results are consistent with the predictions of the model.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    File Function: link to article abstract page
    Download Restriction: no

    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 43 (2008)
    Issue (Month): 04 (December)
    Pages: 1001-1035

    in new window

    Handle: RePEc:cup:jfinqa:v:43:y:2008:i:04:p:1001-1035_01
    Contact details of provider: Postal:
    Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK

    Web page:

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:43:y:2008:i:04:p:1001-1035_01. 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: (Keith Waters)

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 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.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.