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

Abstract

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

Skinner, Frank S. and Gounopoulos, Dimitrios, Financial Contracting and Re-Rating Experience, the Cases of Make Whole, Claw Back and Other Wise Ordinary Callable Bonds (October 1, 2009). Available at SSRN: https://ssrn.com/abstract=1333371 or http://dx.doi.org/10.2139/ssrn.1333371

Frank S. Skinner

Brunel University ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

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