Debt Overhang and the Life Cycle of Callable Bonds

47 Pages Posted: 17 Dec 2018

See all articles by Bo Becker

Bo Becker

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); ECGI

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Viktor Thell

Swedish FSA

Dong Yan

Stockholm School of Economics; Swedish House of Finance

Date Written: December 17, 2018

Abstract

Many US corporate bonds are callable at a predetermined, fixed price. Callability gives firms the ability to re-price their bonds ex-post. It is less clear how it resolves ex-ante contracting frictions. We show empirically that longer maturity and lower credit quality bonds are frequently issued with callable features. These bonds are often called when issuers experience improvements in credit quality. Firms with callable debt are more likely to increase investment following positive industry shocks. Such firms are also more likely to become takeover targets, confirming the prediction of a simple model we construct of debt overhang. The empirical patterns we report fit the theory that call features limit debt overhang by restricting value gains to corporate creditors.

Keywords: Callable bonds, debt overhang, credit risk

JEL Classification: G32, G33, G21

Suggested Citation

Becker, Bo and Campello, Murillo and Thell, Viktor and Yan, Dong, Debt Overhang and the Life Cycle of Callable Bonds (December 17, 2018). Swedish House of Finance Research Paper No. 18-16. Available at SSRN: https://ssrn.com/abstract=3302502 or http://dx.doi.org/10.2139/ssrn.3302502

Bo Becker (Contact Author)

Stockholm School of Economics ( email )

Drottninggatan 98
Dept. of Finance
111 60 Stockholm, 11160
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ECGI ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Viktor Thell

Swedish FSA ( email )

Box 7821
Brunnsgatan 3
Stockholm
Sweden

Dong Yan

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, 111 60
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

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