Abstract

http://ssrn.com/abstract=1641304
 
 

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


Karl S. Okamoto


Drexel University School of Law

David J. Pedersen


Rutgers, The State University of New Jersey - Rutgers University, Camden

Natalie Bucciarelli Pedersen


Drexel University - Earle Mack School of Law

July 16, 2010

5th Annual Conference on Empirical Legal Studies Paper

Abstract:     
Prior studies have generally agreed that bond prices reflect both the event risk faced by the holders of a particular issuer’s debt securities and the degree of protection from event risk contained within the terms of the bond. Therefore, it has been found that bonds without event risk protection command a premium over comparable bonds with “change in control puts” or similar protective covenants. Although prior studies have reached this common conclusion, each has struggled with a common problem. The decision to include protective covenants is endogenous. Bonds facing the highest event risk are likely to be those for which event risk protection is most highly valued. Therefore a determination of the pricing effect of event risk protection must somehow control for the differing degree of event risk faced by the different bonds included in any given study’s sample. While various proxies for the likelihood of an event, a leveraged buyout or recapitalization, have been developed, they are by their nature imprecise. A recent event, a series of court decisions regarding the proposed leveraged buyout of Bell Canada, the largest LBO transaction announced in history, provides a natural experiment for evaluating the pricing effect of event risk protection in corporate bonds that avoids the endogeniety problem. We report the results of that experiment in this paper.

Number of Pages in PDF File: 37

Keywords: bondholder expropriation, change-in-control covenant, event risk, poison puts

JEL Classification: G24, G30, G32, G34

working papers series


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Date posted: July 17, 2010  

Suggested Citation

Okamoto, Karl S. and Pedersen, David J. and Pedersen, Natalie Bucciarelli, The Price Effects of Event Risk Protection: The Results from a Natural Experiment (July 16, 2010). 5th Annual Conference on Empirical Legal Studies Paper. Available at SSRN: http://ssrn.com/abstract=1641304 or http://dx.doi.org/10.2139/ssrn.1641304

Contact Information

Karl S. Okamoto (Contact Author)
Drexel University School of Law ( email )
3320 Market Street
Philadelphia, PA 19104
United States
David J. Pedersen
Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )
Camden, NJ 08102
United States
Natalie Bucciarelli Pedersen
Drexel University - Earle Mack School of Law ( email )
3320 Market Street
Philadelphia, PA 19104
United States
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