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Event Risk Bond Covenants, Agency Costs of Debt and Equity, and Stockholder Wealth

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  • Sung C. Bae
  • Daniel P. Klein
  • Raj Padmaraj

Abstract

We examine the effect of risk covenants in bond indentures on agency costs of debt and equity and stockholder wealth by testing two competing hypotheses for issuing event risk-protected bonds: the stockholder wealth enhancement hypothesis and the managerial entrenchment hypothesis. We find that the issuance of event risk-protected bonds has a more positive impact on stockholder wealth than the issuance of non-protected bonds. Regression analysis indicates that more positive stockholder gains are associated with firms characterized by higher agency costs of debt. These findings suggest that the presence of event risk covenants increases stockholder wealth primarily by lowering a firm's agency costs of debt.

Suggested Citation

  • Sung C. Bae & Daniel P. Klein & Raj Padmaraj, 1994. "Event Risk Bond Covenants, Agency Costs of Debt and Equity, and Stockholder Wealth," Financial Management, Financial Management Association, vol. 23(4), Winter.
    • Handle: RePEc:fma:fmanag:bae94
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    Cited by:

    1. Claudia Kocher & Hei Wai Lee & Karen Strandholm, 2010. "The Influence Of Market Conditions On Poison Put Use In Convertible Bonds," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(2), pages 13-26.
    2. Greg Roth & Cynthia G. McDonald, 1999. "Shareholder-Management Conflict And Event Risk Covenants," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(2), pages 207-225, June.
    3. Manish Tewari & Pradipkumar Ramanlal, 2021. "Analysis of Floating Rate Bonds and the Firm Characteristics: Evidence from the Stock Price Reaction," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(4), pages 01-11, October.
    4. Dachen Sheng & Heather A. Montgomery, 2023. "Bond Issuance as Reputational Signal: Debunking the Negative Perception of Additional Liability," IJFS, MDPI, vol. 11(4), pages 1-19, October.
    5. Torabzadeh, Khalil M. & Roufagalas, John & Woodruff, Criss G., 2000. "Self-selection and the effects of poison put/call covenants on the reoffering yields of corporate bonds," International Review of Economics & Finance, Elsevier, vol. 9(2), pages 139-156.
    6. Sung C. Bae & Daniel P. Klein & Raj Padmaraj, 1997. "Firm Characteristics And The Presence Of Event Risk Covenants In Bond Indentures," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 373-388, September.

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