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AN INSTITUTIONAL INNOVATION TO REDUCE THE AGENCY COSTS OF PUBLIC CORPORATE BONDS
Author(s) -
Amihud Yakov,
Garbade Kenneth,
Kahan Marcel
Publication year - 2000
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2000.tb00046.x
Subject(s) - bond , covenant , business , negotiation , diversification (marketing strategy) , agency cost , agency (philosophy) , finance , accounting , law , corporate governance , marketing , philosophy , epistemology , political science , shareholder
This paper proposes an institutional innovation in the structure of public bonds that is intended to provide some of the advantages of private loans‐ active monitoring, tight covenants, and ease of reorganization‐while retaining the benefits of liquidity and ease of diversification provided by publicly traded securities. The authors propose that a publicly registered corporate bond provide for a “supertrustee” who will act on behalf of bondholders. The supertrustee will be charged with responsibility to monitor the compliance of the borrower with the terms of the bond covenants and given exclusive authority to negotiate amendments to the covenants and decide what action to take in the event of a breach of a covenant.