The Choice Among Non-Callable and Callable Bonds

Abstract

We examine the choice and the offer spreads between callable and non-callable bonds. We find significant differences by industry sector so our results are segmented by financial and non-financial industries. For the financial sector, the popularity of callable and non-callable bonds is significantly related to the economic environment. Financial and high grade non-financial callable bonds are also more likely to be issued via a shelf prospectus. While firms that issue callable bonds do not consistently display the characteristics associated with severe agency problems, the issue choice for below investment grade non-financial and lower rated financial bonds, where we can expect agency problems to be more severe, is more consistent with agency theory than the issue choice for higher rated bonds.