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The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence

Author

Listed:
  • Kenneth Daniels

    () (School of Business, Virginia Commonwealth University)

  • Fernando Díaz

    () (Facultad de Economía y Empresa, Universidad Diego Portales)

  • Gabriel Ramírez

    () (Coles College of Business, Kennesaw State University)

Abstract

Clawback provisions allow the issuer to partially redeem a bond issue often within three years of issuance using proceeds only from new equity issues. Empirical evidence indicates the clawback provision is rarely exercised. This poses an interesting dilemma as clawback provisions are an expensive source of funding, often commanding yields that are significantly higher than traditional corporate bonds. We develop a simple model that provides a rationale for the scarcity of call redemptions and the higher yields of clawback bonds. The model predicts a relation between issuance of clawback bonds, cash flow volatility and the probability of renegotiation of clawback debt contracts.

Suggested Citation

  • Kenneth Daniels & Fernando Díaz & Gabriel Ramírez, 2011. "The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence," Working Papers 28, Facultad de Economía y Empresa, Universidad Diego Portales.
  • Handle: RePEc:ptl:wpaper:28
    as

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    References listed on IDEAS

    as
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    2. Daniels, Kenneth & Diro Ejara, Demissew & Vijayakumar, Jayaraman, 2009. "An empirical analysis of the determinants and pricing of corporate bond clawbacks," Journal of Corporate Finance, Elsevier, vol. 15(4), pages 431-446, September.
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    5. Dhillon, Upinder S. & Noe, Thomas H. & Ramirez, Gabriel G., 2001. "Bond calls, credible commitment, and equity dilution: a theoretical and clinical analysis of simultaneous tender and call (STAC) offers," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 573-611, May.
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    8. Christopher A. Hennessy, 2004. "Tobin's "Q", Debt Overhang, and Investment," Journal of Finance, American Finance Association, vol. 59(4), pages 1717-1742, August.
    9. Goyal, Vidhan K. & Gollapudi, Neela & Ogden, Joseph P., 1998. "A corporate bond innovation of the 90s: The clawback provision in high-yield debt," Journal of Corporate Finance, Elsevier, vol. 4(4), pages 301-320, December.
    10. Rongbing Huang & Gabriel G. Ramírez, 2010. "Speed of Issuance, Lender Specialization, and the Rise of the 144A Debt Market," Financial Management, Financial Management Association International, vol. 39(2), pages 643-673, June.
    11. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
    12. Fluck, Zsuzsanna, 1998. "Optimal Financial Contracting: Debt versus Outside Equity," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 383-418.
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