The Price Effects of Event‐Risk Protection: The Results from a Natural Experiment

26 Pages Posted: 29 Oct 2011

See all articles by Karl S. Okamoto

Karl S. Okamoto

Drexel University Thomas R. Kline School of Law

David Pedersen

Rutgers School of Business-Camden

Natalie Bucciarelli Pedersen

Drexel University Thomas R. Kline School of Law

Date Written: December 2011

Abstract

Prior studies conclude that bond prices reflect both an issuer's event risk and a bond's contractual protections from event risk. Therefore, it is assumed that the market requires a higher return for unprotected bonds than for comparable protected bonds. These prior studies, however, struggle with the problem of isolating the pricing effect by controlling for comparability. Issuers will differ from each other on a number of other attributes that could affect their bond prices. The issue of comparability eludes a simple modeling solution given the indefiniteness and multiplicity of variables that could cause the market to distinguish one issuer from another. Recent court decisions regarding the buyout of Bell Canada Enterprises provide a natural experiment for evaluating the pricing effect of event‐risk protection that mitigates this comparability problem. Based on this experiment, we find support for the prior conclusions that an exogenous shift in event‐risk protection is priced by the market.

Suggested Citation

Okamoto, Karl S. and Pedersen, David and Pedersen, Natalie Bucciarelli, The Price Effects of Event‐Risk Protection: The Results from a Natural Experiment (December 2011). Journal of Empirical Legal Studies, Vol. 8, Issue 4, pp. 878-903, 2011. Available at SSRN: https://ssrn.com/abstract=1950952 or http://dx.doi.org/10.1111/j.1740-1461.2011.01244.x

Karl S. Okamoto

Drexel University Thomas R. Kline School of Law ( email )

3320 Market Street
Philadelphia, PA 19104
United States

David Pedersen

Rutgers School of Business-Camden ( email )

227 Penn Street
Camden, NJ 08102
United States

Natalie Bucciarelli Pedersen

Drexel University Thomas R. Kline School of Law ( email )

3320 Market Street
Philadelphia, PA 19104
United States

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