The agency cost rationale for refunding discounted bonds

The agency cost rationale for refunding discounted bonds

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Article ID: iaor201522796
Volume: 8
Issue: 1
Start Page Number: 43
End Page Number: 50
Publication Date: Mar 1985
Journal: Journal of Financial Research
Authors:
Keywords: investment, government, management
Abstract:

The purpose of this paper is to enhance the understanding of management's motivation for engaging in debt‐for‐debt exchange offers where new long‐term debt with a higher coupon rate is substituted for outstanding debt that is trading at a substantial discount. Some previously advanced arguments that imply a positive effect of such refunding of debt are examined, and their weaknesses are discussed. Then an alternative argument utilizing agency cost theory is advanced, and empirical results are presented to support this alternative argument.

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