The Freeze-out Bond Exchange Offer: An Experimental Approach

Flavio Bazzana, Luigi Mittone and Luciano Andreozzi

Journal of Behavioral Finance, 2015, vol. 16, issue 2, 150-162

Abstract: If a firm wants to withdraw a covenant on a issued bond, it can attempt a consent solicitation combined with an exchange offer (the freeze-out exchange offer). If the bondholders are not fully coordinated, the shareholders can make the exchange offer unfair by issuing the new bond at a price that is lower than the market price. We perform two experiments to isolate (i) the level of information and (ii) the role of the experience of the bondholders in a freeze-out bond exchange offer. In the first experiment, the experience of the participants is a dominant factor compared to access to information. The choice of the symmetric Nash equilibrium, in which every participant accepts the exchange offer, increases with experience. Conversely, in the second experiment, which offers a lower level of experience, the information provided is the dominant factor. In this experiment relative to the first one, the choice of the symmetric Nash equilibria decreases, and the choice of the Pareto superior asymmetric Nash equilibrium, in which two participants reject the exchange offer and the other accepts it, increases. These results have policy implications that may affect exchange offers in the bond market.

Date: 2015
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DOI: 10.1080/15427560.2015.1034860

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