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- Title
The Impact of In-Substance Defeasance on Bondholder and Shareholder Wealth.
- Authors
Johnson, James M.; Pari, Robert A.; Rosenthal, Leonard
- Abstract
This paper hypothesizes and tests the argument that a defeasance transaction initiates a wealth transfer from stockholders to bondholders. Our empirical tests provide compelling evidence of bondholder gains, but no support for shareholder losses when a firm defeases debt. We speculate that the insignificance of the loss to shareholders is primarily due to the size disparity between the value of defeased debt and the market value of outstanding equity, since the suggested economic merits of defeasance appear unfounded. Although we cannot prove an agency motivation for defeasance, we find a very high correlation between compensation tied to earnings and defeasing debt at a book gain.
- Subjects
UNITED States; IN substance defeasance; STOCKHOLDERS; GOVERNMENT securities; INVESTORS; CORPORATION law; DEFEASANCE; STOCKHOLDER wealth; BONDHOLDERS; INVESTOR relations (Corporations)
- Publication
Journal of Finance (Wiley-Blackwell), 1989, Vol 44, Issue 4, p1049
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1989.tb02638.x