Shareholder gains from callable‐bond refundings

Abstract

A re‐examination indicates that current procedures for measuring the benefit realized by shareholders when a firm calls and refunds an outstanding debt obligation are mis‐specified. The key to a proper measurement is found to lie in the identification of the extinguished remaining‐time‐to‐maturity value of the exercised option on the called debt. A simple procedure for assessing that value is provided and incorporated into a corrected measure of the gains from a callable‐bond refunding.

State and Local Government Bond Refinancing and the Factors Associated with the Refunding Decision

“…Much of this literature engages in standard option pricing theory detailing various methods in valuing the gain from the refinancing against the value of the call option. This body of literature can be broken down into four primary areas: (1) theoretical approach to the bond refunding decision (Weingartner 1967;Friedman and Lieber 1975;Emery 1978;Boyce and Kalotay 1979;Lewellen and Rosenfeld 1987;Livingston 1987;Kalotay, Williams, and Fabozzi 1993;Brick and Palmon 1993), (2) the impact of bond refunding on shareholder wealth (Sibley 1974;Yawitz, Jess, and Anderson 1977;Emery and Lewellen 1990;Mitchell 1991;Longstaff and Tuckman 1994), ( 3) the impact of bond calls on reoffering yields and other firm aspects (Riener 1980;Yawitz and Marshall 1981;Chatfield and Moyer 1986), and (4) understanding firm behavior based on refunding and bond call decisions (Thatcher 1985;Crabbe and Helwege 1994;Kerins 2001;McDonald and Van de Gucht 1999;King and Mauer 2000). Unfortunately, the empirical academic literature of municipal bond refinancing is not nearly as robust with only a few studies and most limited only to the efficiency and timing of bond refinancings.…”