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Returns, Risks, and Pricing of Income Bonds, 1956-76 (Does Money Have an Odor?)

John J. McConnell and Gary G. Schlarbaum
The Journal of Business
Vol. 54, No. 1 (Jan., 1981), pp. 33-63
Stable URL: http://www.jstor.org/stable/2352632
Page Count: 31
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Returns, Risks, and Pricing of Income Bonds, 1956-76 (Does Money Have an Odor?)
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Abstract

Within the recent corporate-tax-with-bankruptcy-cost models of optimal capital structure, income bonds, which provide the tax advantages of debt without the bankruptcy-cost disadvantages, are a superior financing instrument. However, U.S. corporations have never issued these bonds in great numbers. In this paper we explore two explanations for the infrequent use of income bonds by U.S. corporations. The traditional explanation is that income bonds have the "smell of death" about them which we interpret to mean that they are persistently "underpriced." The second is that there are some "deadweight" costs associated with income bonds. We conclude that neither of these explanations provides a satisfactory rationale for the reluctance of U.S. corporations to make widespread use of income bonds.

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