The Choice Among Non-Callable and Callable Bonds

44 Pages Posted: 10 Mar 2013 Last revised: 9 Jan 2015

See all articles by Laurence David Booth

Laurence David Booth

University of Toronto - Rotman School of Management

Dimitrios Gounopoulos

University of Bath

Frank S. Skinner

Brunel University

Date Written: August 12, 2014

Abstract

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

Booth, Laurence David and Gounopoulos, Dimitrios and Skinner, Frank S., The Choice Among Non-Callable and Callable Bonds (August 12, 2014). Journal of Financial Research, 37, 2014, pp 435 - 460, Available at SSRN: https://ssrn.com/abstract=2230110 or http://dx.doi.org/10.2139/ssrn.2230110

Laurence David Booth

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Frank S. Skinner

Brunel University ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom

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