Relationship Lending in Bond Markets? Evidence From Corporate Call Policies *

Abstract

Can relationship lending be sustained in public financial markets? We use firms' call decisions as a laboratory to study this question. After a fixed-price call forces existing bondholders to sell their bonds back at below market prices, existing bondholders are far less likely to participate in firms' subsequent bond issuances. The effects are strongest for the largest fund families, such that the call leads to a reduction in their total ownership of these firms' bonds. In turn, firms delay calling their bonds when they have more large fund families in their bondholder base. Finally, firms' borrowing costs are affected by the reputation they develop from their past call decisions. Our results reveal the importance of relationship lending in bond markets and show how firms' financial policies affect these relationships.

Keywords: reputation, relationship lending, bond markets, call policy