1999
Aswath Damodaran
ABSTRACT
The last two decades have seen a stream of innovation in financial markets, especially in the corporate bond arena.
Some of these innovations were designed to give firms more flexibility in designing cash flows on borrowings, allowing
them to match up cash flows on financing more closely to cash flows on assets, thus increasing their debt capacity.
These changes have been for the most part good news for corporate treasurers, but the relentless torrent of innovation
has also resulted in some firms issuing these new and more complex securities for the wrong reasons. Some have
done so to keep up with other firms in their peer group, and other to take advantage of loopholes in the way ratings
agencies and regulatory agencies define debt and equity. In this context, it is worth noting that as corporate
bonds have become more complex, investment bankers once more become indispensable to the process, proving both
pricing and selling support. It is important that firms recognize when complexity serves their interests, and when
it can end up hurting them.
Damodaran: (212) 998-0349 adamodar@stern.nyu.edu
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