Defeasance of Control Rights
We analyse one frequent clause in bonds, covenant defeasance. Covenant defeasance allows the issuer to remove the bond's covenants by placing the remaining payments with a trustee in escrow to be paid out on schedule. We provide theoretical justification for this option and show empirically that it allows inclusion of more covenants in bond issues. We highlight characteristics that make issuers likely to add a defeasance clause. In line with the model's prediction, the empirical analysis documents 13-24 basis points yield reduction for defeasible bonds - annual saving of about $1m, or $11m over the life of the average bond.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
- Campbell, John & Taksler, Glen, 2003.
"Equity Volatility and Corporate Bond Yields,"
3153307, Harvard University Department of Economics.
- John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc.
- John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
- Nöldeke, Georg & Schmidt, Klaus M., 1995.
"Option contracts and renegotiation: A solution to the Hold-Up Problem,"
Munich Reprints in Economics
19329, University of Munich, Department of Economics.
- Georg Noldeke & Klaus M. Schmidt, 1995. "Option Contracts and Renegotiation: A Solution to the Hold-Up Problem," RAND Journal of Economics, The RAND Corporation, vol. 26(2), pages 163-179, Summer.
- Georg Nöldeke & Klaus M. Schmidt, 1992. "Option Contracts and Renegotiation - A Solution to the Hold-Up Problem," Discussion Paper Serie A 417, University of Bonn, Germany, revised Aug 1993.
When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp679. 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: (The FMG Administration)
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.