An Empirical Investigation of Corporate Bond Clawbacks (IPOCs): Debt Renegotiation Versus Exercising the Clawback Option
27 Pages Posted: 26 Oct 2012 Last revised: 2 Dec 2013
Date Written: October 25, 2012
Bond clawback provisions allow the issuer to partially redeem a bond issue often within three years of issuance using proceeds only from new equity issues. We document that clawback bonds are often renegotiated and clawbacks provisions are rarely exercised. We find that the probability of exercising the clawback option increases if the firm has lower leverage, has better return on equity, and is not issuing in the 144 market. We also find that the higher yields observed on clawback bonds are associated with the likelihood of the clawback provision being exercised. We argue that the results are consistent with the view that firms that use clawback provisions are likely to have better fundamentals. These firms exercise the clawback provision because the firm is able to access the equity markets and issue the needed equity for exercising the clawback option. Renegotiation of clawback bond results from the need to refinance the high cost IPOC issues and the difficulty accessing the equity capital markets.
Keywords: Debt renegotiation, Clawbacks, Financial distress
JEL Classification: G32
Suggested Citation: Suggested Citation
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By Arthur Hau