Top management incentives and financial flexibility: The case of make‐whole call provisions

Abstract

Consistent with the premise that make-whole call provisions enhance value-creating financial flexibility, we find that higher sensitivity of managerial wealth to stock price (delta) increases the likelihood that corporate bonds contain make-whole provisions. In line with prior findings that demonstrate financial flexibility can be costly to bondholders, we find that managerial equity incentives impact the incremental effect of make-whole provisions on the pricing of corporate debt securities. Consistent with the flexibility explanation, we also find that the market response as measured by abnormal trading volume to the issuance of make-whole callable debt varies in equity incentives. Overall, our results suggest that managerial incentives play a role in the choice, pricing, and market response to make-whole options in corporate debt securities.

The Relevance of Sectoral Clustering in Corporate Debt Policy: The Case Study of Slovak Enterprises

“…Even Farhangdoust et al (2020) points out significant differences in the indebtedness of firms as a result of the impact of their selected legal form. Corporate indebtedness is significantly influenced by the level and volatility of corporate profits (Fischer and Jensen 2019;Kliestik et al 2022), the costs of financial difficulties (Alvarez-Botas and Gonzalez 2021), the impact of inflation (Jaworski and Czerwonka 2021), the effort to maintain ownership control of the firm (Martins et al 2020), dividend policy (Sierpinska 2022), requirements for the financial flexibility of the firm (Jameson et al 2021), and the method and intensity of taxation (Sobiech et al 2021), while earnings management may also have implications for corporate debt . According to Ramelli and Wagner (2020), the market situation has significant consequences for the financial decision making of the business entity.…”