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Session Chair: Yoshio Nozawa, University of Toronto Discussant: Yancheng Qiu, The University of Sydney
Location:9B312 (3rd basement floor, International Hall)
Presentations
Poison Bonds
Shuo Xia1,2, Rex Wang Renjie3,4
1Halle Institute for Economic Research, Germany; 2Leipzig University; 3VU Amsterdam; 4Tinbergen Institute
This paper documents the rise of "poison bonds" corporate bonds that allow bond- holders to demand immediate repayment in a change-of-control event. The share of poi- son bonds among new issues has grown substantially in recent years, from below 20% in the 1990s to over 60% since the mid-2000s, predominantly driven by investment-grade issues. We show that a key factor behind this rise is the pervasive shareholder aver- sion to poison pills, leading firms to issue poison bonds as an alternative. Moreover, our analysis suggests that this practice potentially entrenches incumbent managers and destroys shareholder value. Holding a portfolio of firms that remove poison pills but promptly issue poison bonds results in negative abnormal returns of −7.3% per year. Our findings have important implications for the agency theory of debt: (i) more debt may not discipline the management; and (ii) even without financial distress, managerial entrenchment can lead to agency conflicts between shareholders and creditors.
