Is there a safety premium in the design of corporate bond contracts?

Sumiko Takaoka

MPRA Paper from University Library of Munich, Germany

Abstract: This study examines empirically whether there is a safety premium in the design of bond contracts by highlighting a safety attribute of general mortgage bonds in Japan, which can give especially strong protection to bondholders, who would have priority in the event of legal liquidation. The effects of a safety attribute were not prominent at first in difference-in-differences analysis. However, the methods for analyzing selectivity bias allow us to provide a safety premium in the design of bond contracts, such as lower spread, lower commission, and larger issue size. The resulting bias would depend on the reputation of the bookrunner. This study uncovers the underlying link for the connection between a safety attribute and the observed and unobserved issuer and bookrunner characteristics, to indicate that a safety premium is related to various terms of bond contracts, including the bookrunner-issuer match.

Keywords: Corporate bonds; general mortgage bonds; Japan; safety premium; special Acts. (search for similar items in EconPapers)
JEL-codes: G10 G24 K20 (search for similar items in EconPapers)
Date: 2018-04-25
New Economics Papers: this item is included in nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:86422

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