Abstract
We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.
| Original language | English |
|---|---|
| Pages (from-to) | 945-985 |
| Number of pages | 41 |
| Journal | Review of Finance |
| Volume | 28 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 1 May 2024 |
Bibliographical note
We thank Christine Parlour (the editor), an anonymous referee, Viral Acharya, Thomas Chemmanur, Greg Duffee, Martin Fridson, Andrew Kalotay, Raj Iyer, Brandon Julio, Gaurav Kankanhalli, Salvatore Miglietta, Gustavo Schwenkler, Antoinette Schoar, Amir Sufi, Alexei Tchistyi, Yuri Tserlukevich, Philip Valta, as well as participants at the Adam-Smith Workshop 2022, CEF Workshop, CICF 2019, HEC-McGill Winter Finance Workshop 2022, NBER Summer Institute 2022 Corporate Finance Conference, NICE Conference 2022, WFA 2022, University of Amsterdam, CAIFC, Colorado State University, Copenhagen Business School, DePaul, Gothenburg, Groningen, Hebrew University, IFN, Nanyang Technological University, SAIF, Singapore Management University, Sydney, Utrecht, and the Swedish House of Finance for comments and suggestions. Becker and Yan wish to acknowledge financial support from “Jan Wallanders och Tom Hedelius Stiftelse” and the Swedish House of Finance. This article was previously circulated under the title “Credit Risk and the Life Cycle of Callable Bonds: Implications for Real Corporate Decisions.”Publisher Copyright:
© The Author(s) 2024.