Complementarity in Bond Design

Abstract

This study examines the joint choice of bond features that corporations make in defining their bonds. Using data on new corporate bond issues from 1990 through 2012, we find that corporate bonds are packages of different provisions and restrictions reflecting complementarities between bond features that change with issuer characteristics. Broadly, we find evidence that asymmetries of information between issuer and investors, agency conflicts between stockholders and bondholders, credit risk, the nature of the firm’s growth prospects, and bond market conditions all play a role in the use or non-use of different corporate bond features.

Keywords: bonds, bond design, covenants

JEL Classification: G12, G19, G32, G39