Analysis of Floating Rate Bonds and the Firm Characteristics

Abstract

We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

Keywords: {'name': 'Corporate Finance'}, {'name': 'Financing'}, {'name': 'Floating Rate Securities'}, {'name': 'Structured Provisions'}

Authors & affiliations

Manish Tewari
Affiliation not supplied

Pradipkumar Ramanlal
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

DOI: 10.1016/S0304-405X(98)00043-9

DOI: 10.1111/j.1540-6261.2007.01282.x

DOI: 10.2307/3666081

DOI: 10.1111/j.1540-6261.1980.tb02205.x

Begley, J. (1994). Restrictive covenants included in public debt agreements: an empirical investigation. Unpublished working paper. University of British Columbia, Vancouver.

DOI: 10.3905/jfi.2017.27.2.052

DOI: 10.1111/j.1540-6261.2007.01221.x

DOI: 10.1111/j.1540-6261.1978.tb02056.x

DOI: 10.3905/jfi.1997.408217

DOI: 10.1111/j.1540-6261.1994.tb04787.x

DOI: 10.1111/j.1540-6261.1991.tb02680.x

DOI: 10.1093/revfin/hhm006

DOI: 10.2307/2937924

DOI: 10.3905/jfi.2002.319325

Fabozzi, F. (2016). Bond Markets, Analysis, and Strategies. Pearson 9th Edition.

DOI: 10.1016/1057-0810(94)90019-1

DOI: 10.1016/j.jfineco.2020.04.006

DOI: 10.1111/j.1540-6261.1996.tb05227.x

DOI: 10.1016/j.jfineco.2003.07.003

Jensen, M. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76, 323–339. https://www.jstor.org/stable/1818789

Kahan, M., Klausner, M. (1993). Antitakeover provisions in bonds: Bondholder protection or management entrenchment? UCLA Law Review (April), 931-982.

DOI: 10.1093/oxfordjournals.jleo.a023394

DOI: 10.2307/2330897

DOI: 10.1016/0378-4266(92)90002-H

DOI: 10.1111/j.1540-6261.1989.tb04390.x

DOI: 10.1111/j.1540-6261.1995.tb04037.x

DOI: 10.1016/0304-405X(86)90049-8

DOI: 10.1016/S0304-405X(98)00045-2

DOI: 10.2307/2330993

DOI: 10.1016/S0929-1199(02)00007-X

DOI: 10.1023/A:1006091829986

DOI: 10.1016/0304-405X(86)90066-8

DOI: 10.1111/j.1475-6803.1999.tb00723.x

DOI: 10.1016/0304-405X(77)90041-1

DOI: 10.3846/btp.2018.33

DOI: 10.1016/j.jfineco.2014.09.011

DOI: 10.1080/23311975.2019.1608006

DOI: 10.1111/j.1540-6261.1985.tb04972.x

DOI: 10.1111/j.1540-6261.1959.tb01580.x