Analysis of Floating Rate Bonds and the Firm Characteristics

Evidence from the Stock Price Reaction

Authors

  • Manish Tewari Menlo College
  • Pradipkumar Ramanlal

DOI:

https://doi.org/10.20525/ijfbs.v10i4.1357

Keywords:

Corporate Finance, Financing, Floating Rate Securities, Structured Provisions

Abstract

We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

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Published

2021-09-28

How to Cite

Tewari, M., & Ramanlal, P. . (2021). Analysis of Floating Rate Bonds and the Firm Characteristics: Evidence from the Stock Price Reaction. International Journal of Finance & Banking Studies (2147-4486), 10(4), 01–11. https://doi.org/10.20525/ijfbs.v10i4.1357