Journal of Corporate Finance Vol. 16 No. 4 2010
Why firms issue callable bonds: Hedging investment uncertainty
Abstract
This paper analyzes a firm's dynamic decisions: i) whether to issue a callable or non-callable bond; ii) when to call the callable bond; and iii) whether to refund it when it is called. We argue that a firm uses a callable bond to reduce the risk-shifting problem in case its investment opportunities become poor. Our empirical findings support this argument. We find that a firm facing poorer future investment opportunities is more likely to issue a callable bond than a firm facing better investment opportunities. In addition, a firm with a higher leverage ratio and higher investment risk is more likely to issue a callable bond. Finally, after a callable bond is issued, a firm with a poor performance and a low investment activity tends to call back a bond without refunding; a firm with the best performance and highest investment activity tends to call back a bond and refund its call; and a firm with mediocre performance and investment activity tends to not call its bonds.
- DOI
- 10.1016/j.jcorpfin.2010.06.008
- Volume
- 16
- Issue
- 4
- Pages
- 588-607
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref