Review of Finance Vol. 28 No. 3 2024

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

Bo Becker¹; Murillo Campello²; Viktor Thell³; Dong Yan⁴

¹ Stockholm School of Economics, CEPR and ECGI , Stockholm, · ² Cornell University and NBER , Ithaca, NY, · ³ Swedish Finansinspektionen , Stockholm, · ⁴ Erasmus University Rotterdam and CEPR , Rotterdam,

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.

DOI

10.1093/rof/rfae001

Volume

28

Issue

3

Pages

945-985

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓