This paper sets forth that sinking funds foster corporate governance, either when they intend to build up the principal of bonds and financial hybrids to be repaid at maturity date, or to plan ahead the purchase of fixed assets in the future. To lay foundations, firstly we expand on the logic of sinking funds, by reviewing the standard model of capital formation. Proven drawbacks of this model, however, pave the way for our proposal of undertaking a portfolio management approach for which we furnish an iterative resetting program that deals with unavoidable imbalances of the underlying portfolio. Secondly, we develop the pragmatics of sinking funds, which focus on the choice problem attached to sinking funds and the fiduciary role expected from an appointed portfolio manager. Lastly, we move on to a protocol with suitable covenants to be embedded in a bond placement, so as to enhance the governance of those organizations that dare to avail themselves of sinking funds.
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