Title

Effectiveness Of Event Risk Covenants In High Yield Bonds: Evidence From Long-Run Stock Performance

Keywords

Bonds; Event Risk Covenants; Event Study; High Yield; Long-Run; Poison Puts; Stock Performance

Abstract

We examine the post-issue long-run performance of the common stock of the firms issuing nonconvertible high yield bonds with event risk covenants (ERCs) over the period five years after the issue date. Using Fama French (1993) four factor regression model to analyze a sample of 217 issues issued between 1986 and 2004, we find statistically and economically significant monthly average abnormal returns between 0.36% and 0.55%, which compounds to 24% to 39% over the five year period. The evidence suggests strong long-run overperformance after the issuance. This result is in contrast to the evidence of underperformance after the straight debt issues (Speiss and Affleck-Graves, 1999). Our results support the evidence that the ERCs in bonds issued by the firms closer to financial distress or with low credit rating, help significantly reduce the agency problem between the common stockholders and the bondholders resulting in direct cost benefit to the firm in terms of reduced yields. This benefit seems to far outweigh the costs to the stockholders in terms of agency cost of potential management entrenchment and/or potential loss of takeover premium. The net result is the higher returns for the shareholders. The full impact of this benefit is only realized in the long-run. © EuroJournals Publishing, Inc. 2012.

Publication Date

7-1-2012

Publication Title

International Research Journal of Finance and Economics

Volume

94

Number of Pages

38-46

Document Type

Article

Personal Identifier

scopus

Socpus ID

84864826576 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84864826576

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