Bond indenture provisions and the risk of corporate debt

Ho, Thomas S.Y.

doi:10.1016/0304-405x(82)90017-4

Cited by 71 publications

(28 citation statements)

References 15 publications

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“…Nevertheless, more recent studies recognize the strategic nature of the default event and find that both equity holders and debt holders can have incentives to 1 Various modifications and extensions on the debt structure, default triggering mechanism, firm value dynamics, and implementation procedures have been proposed in the literature. Prominent examples include Black and Cox (1976), Geske (1977), Ho and Singer (1982), Ronn and Verma (1986), Titman and Torous (1989) Kim, Ramaswamy, and Sundaresan (1993), Longstaff and Schwartz (1995), Leland (1994Leland ( , 1998, , Anderson, Sundaresan, and Tychon (1996), Leland and Toft (1996), Briys and de Varenne (1997), Mella-Barral and Perraudin (1997) Garbade (1999), Fan and Sundaresan (2000), Duffie and Lando (2001), Goldstein, Ju, and Leland (2001), Zhou (2001), Acharya and Carpenter (2002), Huang and Huang (2003), Hull, Nelken, and White (2004), Bhamra, Kuehn, and Strebulaev (2007), Buraschi, Trojani, and AndreaVedolin (2007), Chen, CollinDufresne, and Goldstein (2008), and Cremers, Driessen, and Maenhout (2008).induce or force bankruptcy well before the equity value completely vanishes. Theoretical work on strategic default includes Leland (1994), Leland and Toft (1996), , Mella-Barral and Perraudin (1997), Fan and Sundaresan (2000), Goldstein, Ju, and Leland (2001), Broadie, Chernov, and Sundaresan (2007), and Hackbarth, Hennessy, and Leland (2007).…”

Section: Introductionmentioning

confidence: 99%

A Simple Robust Link Between American Puts and Credit Protection

2010

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We develop a simple robust link between equity out-of-the-money American put options and a pure credit insurance contract on the same reference company. Assuming that the stock price stays above a barrier B > 0 before default but drops and remains below a lower barrier A < B after default, we show that the spread between two co-terminal American put options struck within the default corridor [A, B] scaled by their strike difference replicates a standardized credit insurance contract that pays one dollar at default whenever the company defaults prior to the option expiry and zero otherwise. Given the presence of the default corridor, this simple replicating strategy is robust to the details of pre-and post-default stock price dynamics, interest rate movements, and default risk fluctuations. We use quotes on American puts to infer the value of the credit insurance contract and compare it to that estimated from the credit default swap spreads. Collecting data on several companies, we identify strong co-movements between the credit insurance values inferred from the two markets. We also find that deviations between the two estimates cannot be fully explained by common variables used for explaining American put values, such as the underlying stock price and stock return volatility, but the cross-market deviations can predict future movements in American puts.JEL Classification: C13; C51; G12; G13.

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Section: Introductionmentioning

confidence: 99%

A Simple Robust Link Between American Puts and Credit Protection

2010

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“…James (1987) concluded the importance of maturity from three aspects. First, short term debt contains less risk compare to long term debt and there is a positive relation between the time to maturity of the debt and the elasticity of the value of the bond by holding market value of debt constant (Merton, 1974, Ho andSinger, 1982). Second, according to Flannery (1986), firms' choices of maturity could signal the market about the firms' management assessment of earnings prospects, and firms' that believe the assets are undervalued prefer a short term debt to reveal the true prospects.…”

Section: Maturitymentioning

confidence: 99%

An empirical analysis of the effects of market response to bank loan announcements in Hong Kong stock market

Qing¹,

Gan

Li³

2011

J Bank Regul

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of a thesis submitted in partial fulfillment of the requirements for the Degree of M.C.M An Empirical Analysis of the Effects of Market Response to Bank Loan Announcements in the Hong Kong Stock Market Qing ChenThis study will validate several key results from previous studies of bank loan announcement effects by using the data from Hong Kong market following the 1997 Asian crisis. Banks are believed to play a unique role in financial market which could effectively reduce the problem of information asymmetry and moral hazard. Banks could access borrowers' inside information which is not available to other participants.Thus bank loan announcements convey valuable information to the market, and market response of the stock price should be positive. However, because of the significant reform in both financial market and information market, the valuation of bank loan announcement conveyed need to be reconsidered. This study investigates whether banks are still "unique" in the financial market or whether they are like middlemen between borrowers and investors. Data used in this study is collected from the Hong Kong Stock Exchange Index, and a standard event study with the market model is applied in the research to conduct the empirical analysis.The results suggest bank loan announcements are associated with significantly higher positive abnormal returns than non-bank loan announcements. Based on the market model of event study, market response is found to be significantly positive for loan syndication, short maturity loan and borrower's debt ratio, and negatively related to II firm size and loan size. Bank loans with refinancing and capital expenditure and no specific purpose have significantly higher positive abnormal returns, and borrowers with property and industrial industry type have more significant positive abnormal returns compared to other industry type. The findings also suggest the Hong Kong stock market is efficient in both strong and semi-strong form for bank loan announcements. A strong evidence of information leakage problem is found for nonbank loan announcements. The results are generally consistent with the existing literature.Key Words: bank loan announcements, abnormal returns, information asymmetry, syndication, loan size, loan maturity, loan purpose, firm size, industry type, debt ratio, market efficiency. III ACKNOWLEDGEMENTS

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“…In this setting, the claimholder conflict is the potential for dilution of public bond claims by private debt claims (bank loans) that are not disclosed. The conflict can be severe in this setting because bank debt generally has higher priority in terms of both explicit contractual provisions (see, Barclay and Smith (1995b)) and higher effective priority in time than public bonds (see, e.g., Ho and Singer (1982); Barclay and Smith (1995a)). Therefore, issuing bank loans by municipal entities after the public bonds have been issued dilutes the cash flow claims of existing bond holders.…”

Section: Introductionmentioning

confidence: 99%

Claim Dilution in the Municipal Debt Market

Ivanov

Zimmermann

2018

FEDS

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Using loan-level municipal bank lending data, we examine the debt structure of municipalities and its response to exogenous income shocks. We show that small, more indebted, low-income, and medium credit quality counties are particularly reliant on private bank financing. Low income counties are more likely to increase bank debt share after an adverse permanent income shock while high income counties do not shift their debt structure in response. In contrast, only high income counties draw on their credit lines after adverse transitory income shocks. Overall, our paper highlights the issue of bondholder claim dilution and the importance of municipal disclosure of private debt. * The views stated herein are those of the authors and are not necessarily the views of the Federal Reserve Board or the Federal Reserve System. We thank Stephen Paolillo for excellent research assistance.

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Bond indenture provisions and the risk of corporate debt

Cited by 71 publications

References 15 publications

A Simple Robust Link Between American Puts and Credit Protection

A Simple Robust Link Between American Puts and Credit Protection

An empirical analysis of the effects of market response to bank loan announcements in Hong Kong stock market

Claim Dilution in the Municipal Debt Market

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