Dear colleagues,
you are kindly invited to attend the following research talk:
Jochen Lawrenz (Institute for Banking and Finance, University of Innsbruck) will talk
about
"Optimal Design of Rating-Trigger Step-Up Bonds: Agency Conflicts Versus Asymmetric
Information"
(cf. abstract below)
on Wednesday, May 28th, 2008 at 4 p.m.
at Vienna Univ of Econ & Bsns Admin, Heiligenstaedter Str. 46-48, in Meeting Room 1.
Kind regards,
Stefan Pichler
---------------------------------
Abstract:
In this paper, we analyze corporate bonds with a rating-triggered step-up provision in a
continuous-time framework with bankruptcy costs and tax benefits. While without any
further
frictions, step-up bonds do not add firm value relative to straight debt, agency conflicts
and
asymmetric information are two possible explanations for the issuance of these
instruments. We treat
both motives (separately) in a unified framework to obtain conclusions about both the
optimal design
and the conditions for the use of step-up bonds. The closed-form solutions for the optimal
contract
design reveal that step-up bonds issued by firms that face a risk-shifting problem
fundamentally
differ from those in the case of asymmetric information. Furthermore, we show that firms
with a high
initial risk only use step-up bonds to overcome problems of asymmetric information but not
to
mitigate risk-shifting problems. A further difference between the two motives is that in
the case of
risk-shifting, step-up bonds are only used when the agency conflict is sufficiently
severe, while
for signalling reasons even a modest problem of asymmetric information supports the use of
step-up
bonds.
--
Tanja Veza, Ass.Prof.
Institute for Banking and Finance
Vienna Univ of Econ & Bsns Admin
Heiligenstaedter Str. 46-48, 1190 Vienna, Austria
Phone (Fax): +43 1 31336 (90) 4685