Financial Contracting and Re-Rating Experience, the Cases of Make Whole, Claw Back and Other Wise Ordinary Callable Bonds
35 Pages Posted: 26 Feb 2009 Last revised: 3 Jan 2014
Date Written: October 1, 2009
Existing empirical work supports the notion that make whole and claw back bonds are explained as methods to resolve the underinvestment problem. We suggest that if these provisions genuinely resolve the underinvestment problem then make whole and claw back provision bondholders should share in the benefits from the resolution of the underinvestment problem through more frequent credit upgrades and/or less frequent credit downgrade when compared to a similar sample of otherwise similar ordinary callable bonds. We find evidence that make whole call provisions genuinely alleviates the underinvestment problem but the claw back provision seems to resolve the underinvestment problem at the expense of bondholder’s wealth.
Keywords: Callable bonds, Claw back call provisions, whole make call provisions
JEL Classification: G24, G32, G38, K12, K22
Suggested Citation: Suggested Citation