Enhancing Security Value by Ownership Restrictions: Evidence from a Natural Experiment

30 Pages Posted: 13 Dec 2005

See all articles by Amar Gande

Amar Gande

Southern Methodist University (SMU) - Finance Department

Manju Puri

Duke University - Fuqua School of Business; NBER; FDIC

Abstract

We present new evidence from a natural experiment to show circumstances in which ownership restrictions can enhance value. Our evidence is based on multiple restricted bond issues by an emerging market issuer at 150 basis points lower than comparable bonds, resulting in a billion dollars saving. This is intriguing: how can an emerging market issuer with junk bond ratings obtain such low yields? We argue ownership restrictions enhance value since they enable an issuer to precommit to renegotiate efficiently with a favored clientele in the potential default states, thereby circumventing deadweight costs of prolonged negotiations, particularly when the restricted clientele also values the underlying collateral higher than other investors. Ownership restrictions can also result in a transfer of value from holders of unrestricted bonds to holders of restricted bonds because of implicit seniority of the latter. We empirically test and find support for both value enhancement and value transfer and show robustness to several alternative explanations. Our evidence suggests that firms can benefit from designing securities with ownership restrictions, by offering new securities exclusively to investors who value them the most.

Suggested Citation

Gande, Amar and Puri, Manju, Enhancing Security Value by Ownership Restrictions: Evidence from a Natural Experiment. Financial Management, Vol. 34, No. 4, Winter 2005. Available at SSRN: https://ssrn.com/abstract=869631

Amar Gande (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
2147681945 (Phone)
2147684099 (Fax)

Manju Puri

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-7657 (Phone)

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

FDIC ( email )

550 17th Street NW
Washington, DC 20429
United States

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