 Why firms issue callable bonds: Hedging investment uncertaintyZhaohui Chen, Connie X. Mao and Yong Wang Journal of Corporate Finance, 2010, vol. 16, issue 4, 588-607 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. Keywords: Callable; bond; Debt; agency; problem; Risky; shifting; Investment; uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:16:y:2010:i:4:p:588-607 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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