Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Tewari, Manish

doi:10.3846/btp.2018.33

Cited by 3 publications

(7 citation statements)

References 47 publications

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“…Since the presence of put provision is likely to thwart attempts of takeover of the firm, it could lead to the problem of managerial entrenchment (Cook and Easterwood, 1994;Kahan and Klaussner, 1993;Roth and McDonald (1999)). Tewari (2018) finds strong evidence of the presence of managerial entrenchment in the risky firms with outstanding bonds with put provision. The firms with a higher probability of default are likely to face asset substitution problem thereby, worsening the agency problem between bondholders and stockholders.…”

Section: Put Option In Bondsmentioning

confidence: 99%

“…We assess the stock price reaction (CAR), around the issue date, of the stock of the issuing firms using a window of (-1, +4), 6 day window, as in Tewari (2018). Harvey, Lins, and Roper (2004) use a 6 day window to capture the CAR for the bond issue since, the announcement typically occurs on or after the issue date.…”

Section: 𝑅 ̂𝑖𝑡 = 𝛼 ̂𝑖 + 𝛽 ̂𝑖𝑅 𝑚𝑡 + 𝜀̂𝑖 𝑡mentioning

confidence: 99%

“…We use the following issue specific and the firm specific variables in the empirical analysis following the approach in Tewari et al (2015) and Tewari (2018).…”

Section: Variablesmentioning

confidence: 99%

“…Rest of the paper is structured as follows: Literature review and hypothesis development; Methodology, sample data and variables; Empirical analysis; and the Conclusion. Tewari andRamanlal / International Journal of Finance &Banking Studies, Vol 10 No 4, 2021 ISSN: 2147-4486 Peer-reviewed Academic Journal published by SSBFNET with respect to copyright holders.…”

Section: Introductionmentioning

confidence: 99%

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Analysis of Floating Rate Bonds and the Firm Characteristics

Tewari

Ramanlal²

2021

IJFBS

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We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

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Section: Put Option In Bondsmentioning

confidence: 99%

Section: 𝑅 ̂𝑖𝑡 = 𝛼 ̂𝑖 + 𝛽 ̂𝑖𝑅 𝑚𝑡 + 𝜀̂𝑖 𝑡mentioning

confidence: 99%

“…We use the following issue specific and the firm specific variables in the empirical analysis following the approach in Tewari et al (2015) and Tewari (2018).…”

Section: Variablesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Analysis of Floating Rate Bonds and the Firm Characteristics

Tewari

Ramanlal²

2021

IJFBS

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“…On the other hand, basedon the franchise-value hypothesis, a more efficient company chooses a lower debt to equity ratio to avoid the possibility of liquidation (Margaritis & Psillaki, 2008).Companies can reduce the level of financial distress with Event risk covenants. Event risk covenants, provide an opportunity for investors to resell bonds to companies, usually at par value, protecting investors from the decline in value of bonds due to the restructuring of corporate activities (Tewari, 2018) Based on these descriptions, this research proposes the following hypothesis: H3: Growth investment (X2LEV) significantly affects the financial distress (YFD) in SOEs that receive government funding.…”

Section: Leverage and Financial Distress (Hypothesis -H3)mentioning

confidence: 99%

Assessing Variables Affecting the Financial Distress of State-Owned Enterprises in Indonesia (Empirical Study in Non-Financial Sector)

Sayidah

Assagaf

2020

Business: Theory and Practice

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The financial distress of state-owned enterprises (SOEs) has become the main focus of numerous researchers due to the ongoing financial burden on the state and their inability to secure independent funding. The purpose of this study is to investigate the variables that affect the financial distress of SOEs in Indonesia that have received government subsidies. This research is a quantitative study conducted using secondary data collected from the Indonesian Stock Exchange, from a total of 19 SOEs from 2014 to 2017. The analysis found that investment (X2INV), leverage (X3LEV), cash flow from operating (X4CFO), and firm size (X5SIZE) have a significant negative effect on financial distress in SOEs. It means that increases in these variables will reduce the potential for corporate financial distress. While the independent working capital (X1WC) variable has no significant effect on financial distress, because it is temporary and has a dynamic change, so it is unable to show its influence on financial distress. SOE’s management that receives government subsidies can increase the amount of profitable investment to increase marginal revenue, thereby reducing financial distress. Higher leverage can reduce the level of financial distress, indicating that management uses debt to finance projects that generate higher marginal revenue than marginal costs. This condition has an impact on increasing operating cash flow. The higher the operating cash flow will reduce financial distress.

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Floating Rate Notes in High Rate Environment and the Stock Market Response

Tewari

Ramanlal²

2022

IJFBS

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Previous study finds that the firms with inferior growth options tend to issue callable bonds. Typically, these firms are characterized by stock underperformance. Previous study also finds that the floating rate as a superior alternative to the call provision, which is restrictive, when the interest rates are likely to fall. We study the long-term stock performance of floating rate notes (FRNs) issuing firms, issued when the interest rates are high. Stock overperformance would suggest floating rate as a preferred choice by the firms with high growth options rather the call option. We find that the FRNs are generally investment grade with extremely rare presence of a call option. We perform the analysis using Buy and hold abnormal return (BHAR) as the proxy for the long-term stock overperformance/underperformance. A sample of floating rate notes issued (1654) from 1992 to 2007, a period of high interest rates, reveals significant overperformance by the floating rate notes issuing firms in the high-rate paradigm. High growth firms, in the high-rate environment, significantly benefit from the floating rate provision which is less restrictive and less costly than the call option, which typically provides call protection period and pays a call premium. Floating rate provision better mitigates the interest rate risk for the firms in the high-rate environment. We find that the smaller, high growth, higher leverage, less profitable firms with greater agency issues benefit more from issuing FRNs in the high-rate environment. Our study has relevance to the stock portfolio construction and performance. We also perform a comparative analysis using the sample of floating rate notes issued (270) during 2008 to 2018, a period of low interest rates, and find stock underperformance. The implications are that the call option likely is a better choice for the firm since the firm preserves the right to forego exercising the option.

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Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Cited by 3 publications

References 47 publications

Analysis of Floating Rate Bonds and the Firm Characteristics

Analysis of Floating Rate Bonds and the Firm Characteristics

Assessing Variables Affecting the Financial Distress of State-Owned Enterprises in Indonesia (Empirical Study in Non-Financial Sector)

Floating Rate Notes in High Rate Environment and the Stock Market Response

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