Call Feature and Corporate Bond Yield Spreads
American University of Sharjah - School of Business and Management
Lamia Abdulaziz Obay
Abu Dhabi University
February 26, 2012
Callable bonds offer higher yields compared to non-callable bonds. In this paper, we examine the call spread in a global framework, while controlling for firm-level, bond-level, and country-level variables. Using an international sample of 13,936 bonds issued between 1991 and 2007, we find that callable bonds have a positive call spread, which is statistically and economically significant. Our empirical results hold after a battery of robustness checks. We also find that junk callable bonds have a higher call spread than investment-grade callable bonds, which is consistent with the signaling theory. The empirical results also show that highly leveraged firms have a higher call spread than firms with low leverage, a finding that is consistent with the risk-shifting arguments.
Number of Pages in PDF File: 31
Keywords: credit spread, callable bond, cost of debt, cross-listing
JEL Classification: G30, G32working papers series
Date posted: February 27, 2012
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