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

61 Pages Posted: 20 Jul 2011 Last revised: 2 May 2020

See all articles by Kenneth N. Daniels

Kenneth N. Daniels

Daniels Foundation for Impact Investments and Development

Fernando R. Diaz

School of Business and Economics, Universidad Diego Portales

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 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.

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

JEL Classification: G32, G34

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

Kenneth N. Daniels (Contact Author)

Daniels Foundation for Impact Investments and Development ( email )

New Jersey, NJ 07018
United States

Fernando R. Diaz

School of Business and Economics, Universidad Diego Portales ( email )

Av. Manuel Rodriguez 253
Santiago
Santiago, RM 8370057
Chile
(56 2) 6762804 (Phone)

HOME PAGE: http://www.udp.cl/academicos/directorio_profesores_detalle.asp?iId=1463

Gabriel G. Ramirez

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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