Poison Put Bonds: An Analysis of Their Economic Role

Authors

  • DOUGLAS O. COOK,

  • JOHN C. EASTERWOOD

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    • Cook is from the Financial Institutions Center at the Wharton School, University of Pennsylvania, and Easterwood is from Virginia Polytechnic and State University. We wish to thank Dave Denis, Meir Schneller, René Stulz (the editor), and an anonymous referee for helpful comments. We also wish to thank Melissa Neumann of Lehman Brothers for providing bond index data.

ABSTRACT

This article examines the effect of issuing debt with and without “poison put” covenants on outstanding debt and equity claims for the period 1988 to 1989. The analysis shows that “poison put” covenants affect stockholders negatively and outstanding bondholders positively, while debt issued without such covenants has no effect. The study also finds a negative relationship between stock and bond returns for firms issuing poison put debt. These results are consistent with a “mutual interest hypothesis,” which suggests that the issuance of poison put debt protects managers and, coincidentally, bondholders, at the expense of stockholders.

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