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

63 Pages Posted: 21 Mar 2011 Last revised: 4 Feb 2012

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Fernando Diaz

Universidad Diego Portales

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Date Written: March 15, 2011

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 that hinges on the existence of a separating equilibrium. Firms with stable cash flows and low growth opportunities issue bonds with clawback provisions while firms facing valuable growth opportunities prefer convertible bonds. The predictions of the model are tested and strongly supported by the empirical specifications.

Keywords: IPOCs, Clawback bonds, Renegotiation, Bond Clawbacks, Convertible bonds

JEL Classification: G32, G33

Suggested Citation

Daniels, Kenneth N. and Diaz, Fernando and Ramirez, Gabriel G., The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1787545 or http://dx.doi.org/10.2139/ssrn.1787545

Kenneth N. Daniels

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Fernando Diaz

Universidad Diego Portales ( email )

Vergara 210
Santiago, Santiag
Chile

Gabriel G. Ramirez (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6181 (Phone)

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