The theory of financial economics has failed to distinguish advantages of callable bonds from those of short‐term debt. This paper shows that either type of borrowing can signal a firm's better prospects but that short‐term debt does so at the cost of weakened risk‐sharing with capital markets. By issuing either equity or long‐term, non‐callable debt, a firm with poor investment opportunities will not pool its prospects with those of a better firm. But equity produces superior risk‐sharing. Perhaps this explains the almost complete absence of long‐term, non‐callable bonds from observed corporate capital structures.

This paper addresses the issue of whether firms are required to pay an ex ante premium to investors for bearing the risk of interest‐rate changes. A two‐factor APT model with the market and changes in the yield on long‐term government bonds as factors is employed. The paper shows that, empirically, most of the interest‐sensitive stocks are in the utility industries, and that there is reasonable evidence that the interest factor is priced in the sense of the APT. Several sources for the interest sensitivity are considered, and regulatory lags are focused on as a likely candidate.

This paper addresses the issue of whether firms are required to pay an ex ante premium to investors for bearing the risk of interest-rate changes. A two-factor APT model with the market and changes in the yield on long-term government bonds as factors is employed. The paper shows that, empirically, most of the interest-sensitive stocks are in the utility industries, and that there is reasonable evidence that the interest factor is priced in the sense of the APT. Several sources for the interest sensitivity are considered, and regulatory lags are focused on as a likely candidate.

In this paper, we test the arbitrage pricing theory (APT) in an international setting. Inter‐battery factor analysis is used to estimate the international common factors and the Chow test is used in testing the validity of the APT. Our inter‐battery factor analysis results show that the number of common factors between a pair of countries ranges from one to five, and our cross‐sectional test results lead us to reject the joint hypothesis that the international capital market is integrated and that the APT is internationally valid. Our results, however, do not rule out the possibility that the APT holds locally or regionally in segmented capital markets. Finally, the basic results of both the inter‐battery factor analysis and the cross‐sectional tests are largely invariant to the numeraire currency chosen.