The topic of make-whole call provisions on bond issues remains a relatively unexplored area in modern finance literature, with the exception of Mann and Powers [Mann, S.V. and Powers, E.A., 2003, Indexing a Bond's Call Price: An Analysis of Make-whole Call Provisions, Journal of Corporate Finance 9(5), 535–554.]. This paper examines the corporate finance implications of including such a call feature in bond issuances, and how such issuances are different from bond issuances which are not callable, or which employ regular call features. We find that bond issuances employing make-whole call provisions (1) are accompanied by a significantly positive stock price reaction, (2) exhibit superior post-issuance stock returns, and (3) are associated with positive analyst revisions in the long-term growth rate of earnings. These results suggest that bond issuances which include make-whole call provisions are indeed very different from the other issuances, and are clearly not a case of “much ado about nothing”.

This research investigates the impact of interest rate volatility upon corporate bond yield spreads. We first consider the impact of interest rate volatility upon noncallable bond spreads. Because greater interest rate volatility likely increases the volatility of the firm's debt, we hypothesize that the relation will be positive. Given that we do find a positive relation, we thus investigate whether the positive effect of interest rate volatility on yield spreads is stronger or weaker for callable bonds. We find that the effect is weaker for callable bonds. This result indicates that there is a negative relation between default spreads and call spreads, which is consistent with the theory of Acharya and Carpenter (2002), but in contrast to the theory of King (2002). Furthermore, our results for the relationship between equity volatility and yield spread tend to support Acharya and Carpenter (2002) more than King (2002).

Bonds with either fixed price or make whole call provisions allow for the efficient recontracting of claims, but they differ in terms of their ability to mitigate debt agency costs. Controlling for the influence of bondholder-shareholder conflicts on both the level of covenant protection and selection of a particular type of call provision, we show that firms select call provisions with greater sensitivity to changes in the option-free value of the bond when agency problems are more severe. Our findings are consistent with the Barnea, Haugen and Senbet (1980) theorem that firms select fixed price callable debt to mitigate bondholder-shareholder conflicts.