Risk Management and Agency Theory: Role of the Put Option in Corporate Bonds

This study sets out a new methodology to exemplify, through set of risk metrics called the Greeks, impact bond’s structured provisions (e.g., call, put, and conversion options) on its characteristics propensity for agency conflicts. The is assessed by applying it sample 159 non-convertible bonds, with time-scheduled call put issued between 1977 2005. A structural contingent-claims valuation model used value bonds estimate Greeks. assess credit interest-rate risk, as well provisions’ ability mitigate conflict associated over-investment, under-investment, asset-substitution, information asymmetry about firm’s true among stakeholders. main findings this are that option plays key role in reducing mitigating conflict, protecting against volatility shocks; conversely, risk. sufficiently general apply preferred stock any provisions.