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

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callable bond issuer bond monetary economics debt business debt overhang financial system bond market value (mathematics) economics finance internal debt machine learning computer science

Bo Becker , Murillo Campello , Viktor Thell , Yan Dong ·

YOU? · · 2024 · Open Access · · DOI: https://doi.org/10.1093/rof/rfae001 · OA: W4390772748

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.