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

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.

Keywords: Clawback, Financial Distress, Debt Overhang, Dilution, Debt Design

JEL Classification: G32, G34

Suggested Citation: Suggested Citation

Daniels, Kenneth N. and Diaz, Fernando R. and Ramirez, Gabriel G., The Existence of Corporate Bond Clawbacks (IPOCs): Theory and Evidence (July 19, 2011). 24th Australasian Finance and Banking Conference 2011 Paper, Available at SSRN: https://ssrn.com/abstract=1889202 or http://dx.doi.org/10.2139/ssrn.1889202