Citation

Discussion Paper Details

Please find the details for DP16239 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Credit Risk and the Life Cycle of Callable Bonds: Implications for Corporate Financing and Investing

Author(s): Bo Becker, Murillo Campello, Viktor Thell and Dong Yan

Publication Date: June 2021

Keyword(s): Callable bonds, credit risk, Debt overhang and Investment Decisions

Programme Area(s): Financial Economics

Abstract: Call provisions allow bond issuers to redeem their bonds early. While commonly observed, existing research offers limited insight into the purpose of this contract feature. We show that bond callability is designed to mitigate agency problems, with call features and execution being determined by credit spreads and issuer quality. Callable bonds have significantly higher yields and lower secondary market prices than non-callable bonds ("cost of callability"). Issuers call bonds when their credit quality improves. We provide novel evidence that callability reduces debt overhang affecting decisions ranging from capital investment to takeovers. Our results help explain the prevalence of call features and suggest that callability improves economic efficiency.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16239

Bibliographic Reference

Becker, B, Campello, M, Thell, V and Yan, D. 2021. 'Credit Risk and the Life Cycle of Callable Bonds: Implications for Corporate Financing and Investing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16239