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Motivations for Issuing Putable Debt: An Empirical Analysis

  • Ivan E. Brick
  • Oded Palmon
  • Dilip K. Patro
Reference work entry

Abstract

This paper examines the motivations for issuing putable bonds in which the embedded put option is not contingent upon a company-related event. We find that the market favorably views the issue announcement of these bonds that we refer to as bonds with European put options or European putable bonds. This response is in contrast to the response documented by the literature to other bond issues (straight, convertible, and most studies examining poison puts) and to the response documented in the current paper to the issue announcements of poison put bonds. Our results suggest that the market views issuing European putable bonds as helping mitigate security mispricing. Our study is an application of important statistical methods in corporate finance, namely, event studies and the use of general method of moments for cross-sectional regressions.

Keywords

Agency costs Asymmetric information Corporate finance Capital structure Event study methodology European put General method of moments Management myopia Management entrenchment Poison put 

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Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Department of Finance and Economics, RutgersThe State University of New JerseyNewark/New BrunswickUSA
  2. 2.Department of Finance and EconomicsRutgers Business School Newark and New BrunswickPiscatawayUSA
  3. 3.RADOffice of the Comptroller of the CurrencyWashingtonUSA

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