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4 2013 12:30 - 13:30
Via Roentgen 1, II floor, room 2 e4 sr 03

Covenants and Collateral in Japanese Corporate Straight Bonds: Choice and Yield Spread

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Yasuhiko Tanigawa, Waseda University

BROWN BAG SEMINAR


Abstract:
How a firm chooses a set of covenants and of collateral to pledge when issuing straight
bonds publicly in Japan? Covenants and collaterals are contract clauses intended to
protect rights of the bondholders. If the protection is priced in the issue, why do firms
try to put them all in the issue? Taking it into account that we only observe data for a
covenant-collateral type chosen for an issue, we estimate a relation between issue prices
(yield spreads) and credit risk factors and other firm/issue characteristic variables.
We obtained a distinct relationship for each covenant-collateral type from two-step
estimations of a Heckman type. In the first step we estimate multinomial logit models
of covenant-collateral choice, and found supports for the physical cost hypothesis, the
hysteresis hypothesis, and signaling hypothesis. Most notably, however, we found that
strategic default concerns involve direct costs in the choice, not through indirect effects
on the yield spread.




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