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Corporate Bond Guarantees and The Value of Financial Flexibility

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  • Massa, Massimo
  • Manconi, Alberto
  • Altieri, Michela

Abstract

We examine the effects of the decision of parent companies to guarantee bonds issued by their subsidiaries. The market value of the parent firm’s outstanding bonds drops two times more when it issues a guarantee for subsidiary debt than when it issues a new bond in its own name. This effect is exacerbated when the parent is financially constrained, or when its bonds are less liquid. Subsidiary guaranteed debt has less stringent covenant protection, and a longer maturity, consistent with subsidiary guaranteed debt providing greater flexibility to the parent. Our estimates imply a value of financial flexibility, measured as the difference in the impact on bond yield spreads between parent and subsidiary guaranteed bonds, of about 30 bps.

Suggested Citation

  • Massa, Massimo & Manconi, Alberto & Altieri, Michela, 2017. "Corporate Bond Guarantees and The Value of Financial Flexibility," CEPR Discussion Papers 11992, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11992
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    Cited by:

    1. Xueying Zhang & Shansheng Gao & Jian Jiao, 2018. "Moral Hazard Effects of Corporate Bond Guarantee Purchases: Empirical Evidence from China," Journal of Economics and Behavioral Studies, AMH International, vol. 10(5), pages 100-115.

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    More about this item

    Keywords

    Bond returns; Bond guarantees; Subsidiary firms; Financial flexibility;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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