| In general, this dissertation addresses the question: What is the nature and design of the debt and equity claims that maximize shareholder wealth, in the presence of market frictions. More specifically, we consider a number of different features, and we attempt to explain why these features, when optimally constructed, maximize shareholder wealth.; This dissertation consists of three essays. In the first essay (Chapter 2), two different call provisions are defined: One, the standard in the U.S., and the other, the most common form in Canada. These two provisions are then compared the basis of their contributions to shareholder wealth, in the presence of market frictions. Our analysis includes both theoretical and empirical components, the latter involving a clinical survey of active and potential users. We find that transactions costs rationales, as well as participants' perceptions of market inefficiencies, motivate the use of both call provisions in general, and the floating price call provision common in Canada, in particular. Agency cost and tax rationales do not play a role in the decision-making process, contrary to expectations.; In the second essay (Chapter 3), we calculate and compare the coupon required when an issuer chooses to embed fixed versus floating price call provisions in a bond issue. While valuation research usually concentrates on the price of the security/feature, we look at the extra cash flow required in each case. We find that the floating price call provision allows for lower coupon payments and that each call provision possesses markedly different risk-reduction properties, although neither provision dominates the other, in this respect.; In the third essay (Chapter 4), we study the determinants of the capital structure and debt maturity decisions, treating them first as individual decisions, and then as a joint decision. Our empirical results suggest that the capital structure and debt maturity decisions may be jointly determined based on the agency and transactions costs faced by the firm. However, the low level of significance for our joint model tests, in comparison to those from our individual model tests, suggests that we cannot confirm our hypotheses regarding the joint decision-making process. |
