Does the Choice Between Fixed Price and Make Whole Call Provisions Reflect Differential Agency Costs?

Posted: 3 May 2018

See all articles by Michael J. Alderson

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business

Fang Lin

Pittsburg State University - Kelce College of Business

Duane Stock

University of Oklahoma - Michael F. Price College of Business

Date Written: October 2017

Abstract

Bonds with either fixed price or make whole call provisions allow for the efficient recontracting of claims, but they differ in terms of their ability to mitigate debt agency costs. Controlling for the influence of bondholder-shareholder conflicts on both the level of covenant protection and selection of a particular type of call provision, we show that firms select call provisions with greater sensitivity to changes in the option-free value of the bond when agency problems are more severe. Our findings are consistent with the Barnea, Haugen and Senbet (1980) theorem that firms select fixed price callable debt to mitigate bondholder-shareholder conflicts.

Keywords: Fixed Price Call Provision, Make Whole Call Provision, Debt Agency Costs, Restrictive Covenants

JEL Classification: G12, G32

Suggested Citation

Alderson, Michael J. and Lin, Fang and Stock, Duane, Does the Choice Between Fixed Price and Make Whole Call Provisions Reflect Differential Agency Costs? (October 2017). Journal of Corporate Finance, Vol. 46, 2017, Available at SSRN: https://ssrn.com/abstract=3155333

Michael J. Alderson (Contact Author)

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States
314-977-8169 (Phone)
314-977-3897 (Fax)

Fang Lin

Pittsburg State University - Kelce College of Business ( email )

1701 S Broadway St
Pittsburg, KS N.A. 66762
United States

Duane Stock

University of Oklahoma - Michael F. Price College of Business ( email )

307 W Brooks
Norman, OK 73019
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
277
PlumX Metrics