![]() ![]() The fact that markets are volatile, by itself, does not imply that they are not efficient. Bondholders can protect themselves by restricting investment policy. (c) Acquiring a risky business: If a risky business is acquired, existing bondholders may find themselves worse off since the underlying debt is now riskier. Bondholders can protect themselves by inserting protective puts into their debt, allowing them to put the bonds back to the firm and receive face value. (b) A leveraged buyout: If the existing debt is not refinanced at the “new” interest rate, existing bondholders will find the value of their holdings are lower after the LBO. Bondholders can protect themselves by constraining dividend policy. (a) An increase in dividends: Make existing debt riskier and reduce its value. Board of Directors: Directors are often chosen by the incumbent managers (rather than by stockholders), own few shares and lack the expertise/information to ask tough questions of incumbent managers. In addition, the corporate charter is often tilted to provide incumbent managers with the advantage, if there is a contest at the annual meeting. Annual Meeting: Stockholders may not show up at annual meetings or be provided with enough information to have effective oversight over incumbent management. ![]()
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