The freeze-out bond exchange offer. An experimental approach

A freeze-out bond exchange offer can occur when a firm wants to replace an exist- ing bond, issued with a covenant, with a new bond that does not have this type of restriction. If the bondholders are not fully coordinated, the shareholders can make the exchange offer unfair to capture wealth from the bondholders. We perform two experiments using the freeze-out game proposed by Oldfield (2004) to isolate (i) the level of information in the exchange offer and (ii) the role of the experience of the bondholders. The results are statistically significant. In the first experiment, they show that experience is a dominant factor with respect to information. Conversely, in the second experiment, the information becomes dominant with respect to expe- rience. The percentages of the choices for the symmetric Nash equilibria are greater in the first experiment. However, in the second experiment, the choices of the asymmetric Nash equilibrium, which is Pareto superior in the game, are greater than in the first experiment. These results have policy implications that may affect exchange offers in the bond market.