The Covenant-Defeasance Option in Corporate Bonds
Biography
Before joining NHH in 2009, Professor Thorburn was a full-time faculty member at the Tuck School of Business at Dartmouth College, USA.
Her research focuses on M&A, credit, bankruptcy, IPOs, corporate governance, and corporate social responsibility.
She publishes regularly in leading academic journals, including:
- Journal of Finance
- Journal of Financial Economics
- Management Science
- Journal of Financial and Quantitative Analysis
- Journal of Financial Intermediation
- Journal of Corporate Finance
- Journal of Environmental Economics and Management
Professor Thorburn is a Research Associate of the Center for Economic Policy Research (CEPR) in London. She is also a Research Affiliate of the European Corporate Governance Institute (ECGI) in Brussels.
She is a Director of the Board of:
- Argentum Asset Management AS
- Maritime & Merchant Bank ASA
- Nussir ASA
- Preferred Global Health AS
- Green LNG Services AS
- Horus AS
She was previously held roles as:
- Director of the Board at SEB Investment Management AB and Nordea Bank Norway ASA
- Director of the Financial Management Association International
- Council member of the Society for Financial Studies
- Director of the Executive Committee of the European Finance Association
She has served on several public committees on banking regulation and the investment strategy of the $1.5 trillion Government Pension Fund Global. She regularly participates in legal proceedings as an expert witness and judge.
Abstract
Corporate bonds include restrictive covenants that can prevent firms from pursuing valuable growth opportunities ex-post and are virtually impossible to renegotiate. We study a common but little known contractual provision—the defeasance option—which allows issuers to immediately remove all covenants without retiring the bond.
Our theoretical model predicts, and our large-sample empirical analysis confirms, that financially constrained issuers facing high uncertainty and valuable growth opportunities, and bonds with numerous covenants, are more likely to include defeasance. We also show that investors demand lower yields when defeasance is included in non-callable and make-whole bonds, but higher yields in fixed-price callable bonds.