At the end of 2013, the share of domestic government debt held by the banking sectors of Eurozone countries was more than twice the amount held in 2007. We show that these increased bond holdings generated a crowding out of corporate lending. We find that the corporate loan supply was depressed by domestic sovereign bonds exclusively during the crisis period (2010–11). The crowding-out pattern holds across firms with different relationship banks within a given country. These findings suggest that sovereign bond holdings negatively impact private capital formation and reflect financial repression. We show that direct government ownership, as well as government influence through banks’ boards of directors, is among the channels used to influence banks.

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.