The Choice Among Non-Callable and Callable Bonds
44 Pages Posted: 10 Mar 2013 Last revised: 9 Jan 2015
Date Written: August 12, 2014
We examine the choice and the offer spreads between callable and non-callable bonds. We find significant differences by industry sector so our results are segmented by financial and non-financial industries. For the financial sector, the popularity of callable and non-callable bonds is significantly related to the economic environment. Financial and high grade non-financial callable bonds are also more likely to be issued via a shelf prospectus. While firms that issue callable bonds do not consistently display the characteristics associated with severe agency problems, the issue choice for below investment grade non-financial and lower rated financial bonds, where we can expect agency problems to be more severe, is more consistent with agency theory than the issue choice for higher rated bonds.
Keywords: callable bonds, non-callable bonds, call premiums
JEL Classification: G24, G32, G38, K12, K22
Suggested Citation: Suggested Citation