Poison Bonds

46 Pages Posted: 26 Jun 2023 Last revised: 5 Feb 2024

See all articles by Rex Wang Renjie

Rex Wang Renjie

Vrije Universiteit Amsterdam; Tinbergen Institute

Shuo Xia

Halle Institute for Economic Research; University of Leipzig - Faculty of Economics and Management Science

Date Written: June 20, 2023

Abstract

This paper documents the rise of “poison bonds”, which are corporate bonds that allow bondholders to demand immediate repayment in a change-of-control event. The share of poison bonds among new issues has grown substantially in recent years, from below 20% in the 90s to over 60% mid-2000s. This increase is predominantly driven by investment-grade issues. We provide causal evidence that the pressure to eliminate poison pills has led firms to issue poison bonds as an alternative. Our analysis suggests that this practice entrenches incumbent managers and destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of -7.3% per year. Our findings have important implications for the agency theory of debt: (i) more debt may not discipline the management; and (ii) even without financial distress, managerial entrenchment can lead to agency conflicts between shareholders and creditors.

Keywords: Poison put, poison pills, agency costs of debt, managerial entrenchment, debt contracts

JEL Classification: G30, G34

Suggested Citation

Wang, Renjie and Xia, Shuo, Poison Bonds (June 20, 2023). Available at SSRN: https://ssrn.com/abstract=4486434 or http://dx.doi.org/10.2139/ssrn.4486434

Renjie Wang (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081 HV

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Shuo Xia

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

University of Leipzig - Faculty of Economics and Management Science ( email )

Leipzig, 04109
Germany

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