Daniel P. Klein

Event Risk Bond Covenants, Agency Costs of Debt and Equity, and Stockholder Wealth

We examine the effect of risk covenants in bond indentures on agency costs of debt and equity and stockholder wealth by testing two competing hypotheses for issuing event risk-protected bonds: the stockholder wealth enhancement hypothesis and the managerial entrenchment hypothesis. We find that the issuance of event risk-protected bonds has a more positive impact on stockholder wealth than the issuance of non-protected bonds. Regression analysis indicates that more positive stockholder gains are associated with firms characterized by higher agency costs of debt. These findings suggest that the presence of event risk covenants increases stockholder wealth primarily by lowering a firms agency costs of debt.

Determinants of Underwriter Participation in Initial Public Offerings of Common Stock: An Empirical Study

This paper examines an optimal underwriter participation model and develops testable hypotheses regarding the influence of certain factors on the degree of underwriter participation in initial public offerings (IPOs) of common stock. The issue of underwriter participation is important primarily due to the tradeoff between foregone underwriter compensation and underwriting risk reduction. The results of this paper indicate that factors related to the issue, issuing firm, underwriter, and IPO market conditions all are important determinants of the participation decision. Interestingly, the results also show that the importance of these factors is not consistent across underwriter prestige groups. In particular, factors external to underwriters (e.g., the issuing firm and market characteristics) are more important for explaining nonprestigious underwriter participation, while factors related to underwriters themselves play a more important role for explaining prestigious underwriter participation. Copyright Blackwell Publishers Ltd 1999.

Nominal rates, real rates, and expected inflation: Results from a study of U.S. Treasury Inflation-Protected Securities

Abstract This paper studies U.S. Government issued inflation-indexed bonds, known by the acronym TIPS (Treasury Inflation-Protected Securities). We test whether changes in nominal interest rates are related to changes in expected inflation, and we also examine the duration of TIPS bonds relative to the duration of ordinary (nominal) Treasury bonds. In addition, we present evidence of the accuracy of the inflation estimates generated using a pricing algorithm. The results of the paper indicate that changes in nominal interest rates are significantly related to changes in expected inflation; that the hypothesis that nominal interest rates adjust on a one-for-one basis with the change in expected inflation cannot be rejected; and, that investors systematically underestimated the rate of inflation in their pricing of TIPS bonds for the time period of the study.

Further Evidence on Corporate Bonds with Event-Risk Covenants: Inferences from Standard and Poor's and Moody's Bond Ratings

This paper considers potential differences in the appraisal of event-risk covenants by the two rating agencies, SP the difference, however, is not statistically significant. Regression analysis shows that the S&P event-risk rankings are significantly, positively related to bond yield spreads, indicating that the market values event-risk covenants and that greater yield spreads are associated with lower event- risk protection. Regression analysis further shows that the event-risk rankings in a regression model, in conjunction with the Moodys bond ratings, are also significantly related to bond yield spreads. Overall, the results indicate that the market views the event-risk covenants as important, but that Moodys does not perceive these covenants to be strong enough to provide a rationale to upgrade its bond ratings. This evidence is consistent with the observation that the majority of event-risk covenants, as ranked by S&P, provide weak or little protection to bondholders.