The issuance of callable bonds under information asymmetry |
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| Institution: | 1. Department of Finance, University of Nevada, Las Vegas, United States;2. College of Business Administration, Kookmin University, Seoul, South Korea;1. Research Department, Hong Kong Monetary Authority, 55/F, Two International Finance Centre, 8, Finance Street, Central, Hong Kong, China;2. Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong, Shatin, N.T., Hong Kong, China;1. Shanghai University of Finance and Economics, China;2. Sogang University, South Korea;3. Monash Business School, Monash University, Wellington Road, Clayton, VIC 3800, Australia;1. Department of Economics, Michigan State University, East Lansing, MI 48824-1024, USA;2. Department of Finance, Michigan State University, East Lansing, MI 48824-1024, USA;3. School of Economics and Finance, Queen Mary University of London, UK;4. Rimini Center for Economic Analysis, Italy;5. Department of Economics, Kookmin University, Seoul, Republic of Korea;1. Department of Economics, Tshwane University of Technology, South Africa;2. Department of Economics, University of Pretoria, Pretoria 0002, South Africa |
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| Abstract: | We reconsider the role of asymmetric information in motivating the issuance of callable bonds. The previous literature has emphasized a possibility that a call feature serves as a signal of issuer quality. We demonstrate that asymmetric information can motivate use of a call even when this action does not signal quality in equilibrium. We construct a matched sample of callable and non-callable bonds that permits us to control for non-informational effects on the call issuance decision. Empirical evidence from speculative grade bond markets is consistent with the hypotheses that asymmetric information motivates use of the call feature, but there is no evidence that inclusion of the call functions as a signal to the market. |
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