Credit risk, debt overhang, and the life cycle of callable bonds

Abstract We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are joint...

Full description

Saved in:
Bibliographic Details
Published in:Review of Finance 2024-05, Vol.28 (3), p.945-985
Main Authors: Becker, Bo, Campello, Murillo, Thell, Viktor, Yan, Dong
Format: Article
Language:English
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Abstract We show that callable bonds have both higher yields and lower market prices than matched non-callable bonds of the same issuer-time, reflecting the value of call features to issuers and investors. This “value of callability” as well as the inclusion and the exercise of call rights are jointly determined by issuer credit quality. Critically, our agency-based theoretical and empirical analyses show that callability reduces debt overhang in corporate mergers. Our results help explain the value and increasing prevalence of callable bonds in credit markets.
ISSN:1572-3097
1875-824X
1573-692X
1875-824X
DOI:10.1093/rof/rfae001