Straight Debt Issues Research Articles

Putable Bonds, Risk-Shifting Problems, and Information Asymmetry

This article presents an empirical examination of issuers’ motives to issue putable bonds using a comprehensive sample of putable and straight debt issues from 1976 to 2019. We focus on the regular putable bonds that are not tied to specific event risks and are nonconvertible and noncallable. We find that putable bond issues span over the past 4 decades and across industry groups. These bonds are smaller in offer size, are longer in maturity, and have fewer covenants than straight debt. Using Probit and Tobit regressions, we find that firms with greater risk-shifting incentives measured by market-to-book ratio and WW Index are more likely to issue putable bonds. We also find that issuers with a high level of information asymmetry are more likely to issue putables. Our findings suggest the put option can be viewed as an effective contracting term that helps attract bondholder interest and alleviate borrowing costs for issuers. Finally, we consider the simultaneity of the decisions on putable, covenants, and leverage and find further confirmation for the risk-shifting and information asymmetry hypothesis for putable issuances.

Speed of Issuance, Lender Specialization, and the Rise of the 144A Debt Market

Using a large sample of convertible and straight debt issues in the public, 144A, and bank loan markets from 1991 to 2004, we find that the 144A market has risen largely at the expense of the nonshelf public market, the overwhelming majority of the 144A issues are subsequently registered, and straight debt issuers with the highest credit quality and transparency tend to use the shelf public market. Our findings suggest that firms’ preference for speed of issuance drives the growth of the 144A market, and banks and qualified institutional buyers have advantages over public lenders in handling credit risk and information asymmetry.

Speed of Issuance, Lender Specialization, and the Rise of the 144A Debt Market

Using a large sample of convertible and straight debt issues in the public, 144A, and bank loan markets from 1991-2004, we find that the 144A market has risen largely at the expense of the non-shelf public market, the overwhelming majority of the 144A issues are subsequently registered, and straight debt issuers with the highest credit quality and transparency tend to use the shelf public market. Our findings suggest that firms’ preference for speed of issuance drives the growth of the 144A market, and banks and qualified institutional buyers have advantages over public lenders in handling credit risk and information asymmetry.

The Wealth Effects of REIT Straight Debt Offerings

Executive Summary. The market's reaction to seventy-four real estate investment trust (REIT) straight debt issues between 1991 and 1997 is examined. No significant market reaction to straight debt issues on the announcement day is found. The findings also show that in univariate tests of announcement day returns, the market reaction to a straight debt issue is inversely related to the issuer's level of existing cash and inversely related to investment opportunities as measured by Tobin's q. These results differ from previous findings for industrial firms in Howton, Howton and Perfect (1998). The differences between REITs and industrials may be due to the regulatory structure of REITs.

The Performance of Long‐run Stock Returns Following Issues of Public and Private Debt

This study uses a balance sheet‐based method to identify both public and private debt issues. This feature is important because there have been no studies of the information content of private debt issues, while private debt is substantially more prevalent than public debt. We find no abnormal returns following straight debt issues. However, convertible debt issuers under‐perform the market on the order of 50 to 70 percent in the following five years. In pursuit of explanations, we find that convertible debt issues signal a deterioration of future profitability, which accounts for at least part of the stock price underperformance.

THE MARKET REACTION TO STRAIGHT DEBT ISSUES: THE EFFECTS OF FREE CASH FLOW

AbstractIn this paper we measure the market reaction to 937 straight debt issues between 1983 and 1993. We find a negative and significant market reaction to a straight debt announcement. In addition, we find that the market reaction to a straight debt issue is directly related to the issuing firm's level of existing cash and inversely related to the issuing firm's investment opportunities.

The Performance of Long-run Stock Returns Following Issues of Public and Private Debt

This study investigates the long-run stock returns following issues of corporate debt. The investigation of long-run returns allows us to use a balance sheet-based method of identifying debt issuers, which has two major advantages. First, the balance sheet method identifies both public and private debt issues. This feature is important because there have been no studies of the information content of private debt issues, while private debt is substantially more prevalent than public debt. Second, the balance sheet-based method yields a comprehensive sample that is approximately eight times larger than those from other studies that investigate long-run performance after debt issues. We find no abnormal mean or value-weighted returns in the five years following straight debt issues. However, we find that convertible debt issuers underperform the market on the order of 50 to 70 percent in the following five years. In pursuit of explanations, we find that convertible debt issues signal a deterioration of future profitability, which accounts for at least part of the stock price underperformance.

THE COSTS OF RAISING CAPITAL

AbstractWe report the average costs of raising external debt and equity capital for U.S. corporations from 1990 to 1994. For initial public offerings (IPOs) of equity, the direct costs average 11.0 percent of the proceeds. For seasoned equity offerings (SEOs), the direct costs average 7.1 percent. For convertible bonds, the direct costs average 3.8 percent. For straight debt issues, the direct costs average 2.2 percent, although they are strongly related to the credit rating of the issue. All classes of securities exhibit economies of scale, although they are less pronounced for straight debt issues. IPOs also incur a substantial indirect cost due to short‐run underpricing. Most large equity offers include an international tranche, although debt issues do not.

Convertible Bond Issues: Evidence from Security Markets

AbstractA convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.

Dividend Payout and the Valuation Effects of Bond Announcements

Recent theoretical models suggest debt and dividends can serve as substitute free cash flow control or signaling devices. I examine share price responses to announcements of straight debt issues and test whether there are systematic differences between low and high dividend payout firms. Share price response is significantly positive for low growth-low dividend payout firms, and is negatively related to cross-sectional dividend payout. The results support arguments that debt and dividends are substitutes. The results also support arguments that debt provides free cash flow or signaling benefits, but suggest the benefits are significant only for firms with low levels of substitutes. I also document that low growth-low dividend payout firms enter capital markets less frequently, but find no relation between share price response and this frequency.

An Analysis of the Wealth Effects of Japanese Offshore Dollar-Denominated Convertible and Warrant Bond Issues

Offshore dollar-denominated equity-linked issues were a more important source of funds for Japanese companies during the 1980s than domestic equity and straight debt issues combined. Using a sample of Japanese equity-linked offshore issues from 1977 to 1989, we find that the announcement of these issues is accompanied by a significant positive abnormal return. This contrasts with evidence that U.S. equity-linked issues have a significant negative stock price reaction. We provide an explanation for the difference in stock price reactions between U.S. and Japanese issues that is based on the greater influence on managers' security issue decisions of long-term investors and banks in Japan than in the U.S.

The Stock Price Effect of Risky Versus Safe Debt

This paper tests whether there is a difference in the stock price reactions to industrial straight debt offerings of different risk. Using bond ratings at the time of announcement as a measure of risk, we find that there is no monotonic relation between stock price impact and rating and no statistically significant difference across risk classes, even though the sample includes low-rated debt issues from recent years. This confirms earlier evidence on straight debt issues, but differs from the evidence on convertible securities. The paper also finds that the results for straight debt are not affected by shelf registrations or by the issuing firms' involvement in merger and acquisition-related activity.

Insider Trading before New Issue Announcements

On average, insiders are net sellers of their firms' common stock for several months before announcements of new common stock and convertible debt issues. There is no evidence of abnormal insider trading before announcements of straight debt issues. These results suggest that the prospect of legal and market penalties does not deter a significant amount of insider trading before new issue announcements, and are consistent with the hypothesis that managers have superior information that is conveyed to the market through new equity issues.

Some evidence on the uniqueness of bank loans

This paper presents evidence that banks provide some special service with their lending activity that is not available from other lenders. I find evidence that bank borrowers, not CD holders, bear the cost of reserve requirements on CDs. In addition, I find a positive stock price response to the announcement of new bank credit agreements that is larger than the stock price response associated with announcements of private placements or public straight debt offerings. Finally, I find significantly negative returns for announcements of private placements and straight debt issues used to repay bank loans.