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The Price Effects of Event‐Risk Protection: The Results from a Natural Experiment

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  • Karl Okamoto
  • David Pedersen
  • Natalie Pedersen

Abstract

Prior studies conclude that bond prices reflect both an issuer's event risk and a bond's contractual protections from event risk. Therefore, it is assumed that the market requires a higher return for unprotected bonds than for comparable protected bonds. These prior studies, however, struggle with the problem of isolating the pricing effect by controlling for comparability. Issuers will differ from each other on a number of other attributes that could affect their bond prices. The issue of comparability eludes a simple modeling solution given the indefiniteness and multiplicity of variables that could cause the market to distinguish one issuer from another. Recent court decisions regarding the buyout of Bell Canada Enterprises provide a natural experiment for evaluating the pricing effect of event‐risk protection that mitigates this comparability problem. Based on this experiment, we find support for the prior conclusions that an exogenous shift in event‐risk protection is priced by the market.

Suggested Citation

  • Karl Okamoto & David Pedersen & Natalie Pedersen, 2011. "The Price Effects of Event‐Risk Protection: The Results from a Natural Experiment," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 8(4), pages 878-903, December.
    • Handle: RePEc:wly:empleg:v:8:y:2011:i:4:p:878-903
    DOI: 10.1111/j.1740-1461.2011.01244.x
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    References listed on IDEAS

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