Bond Calls, Credible Commitment, and Equity Dilution: A Theoretical and Clinical Analysis of Simultaneous Tender and Call (Stac) Offers

Posted: 10 Oct 1998

See all articles by Upinder Dhillon

Upinder Dhillon

SUNY at Binghamton - School of Management

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Gabriel G. Ramirez

Kennesaw State University - Michael J. Coles College of Business

Abstract

This paper investigates, from both a theoretical and clinical perspective, bond tender offers accompanied by a threat to call nontendered bonds, or so-called STACs. The theoretical analysis explains the use of STACs and derives conditions under which the call threats embedded in STACs are credible. These conditions relate to the degree of bondholder coordination, and the relative costs of adverse selection and suboptimal call policies. Next, three cases of actual STACs-James River, May Department Stores, and Houston Power and Light-are investigated. A rough correspondence between the evolution of these STACs and the different strategic equilibria of the model is established.

JEL Classification: D82, G33

Suggested Citation

Dhillon, Upinder S. and Noe, Thomas H. and Ramirez, Gabriel G., Bond Calls, Credible Commitment, and Equity Dilution: A Theoretical and Clinical Analysis of Simultaneous Tender and Call (Stac) Offers. Available at SSRN: https://ssrn.com/abstract=6387

Upinder S. Dhillon

SUNY at Binghamton - School of Management ( email )

Binghamton, NY 13902-6015
United States
607-777-4381 (Phone)
607-777-4422 (Fax)

Thomas H. Noe (Contact Author)

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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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