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"In light of the dramatic changes in the callable bond market, we reexamine the determinants of callable bonds. Using data from 1980-2003, we find that callable bonds are often issued by firms with both information asymmetry and underinvestment problems. However, risk-shifting does not appear to be a major factor. Furthermore, we find that interest rate hedging is an important factor for investment-grade bonds and when interest rates are high but not so for below-investment-grade bonds or when rates are low." Copyright (c) 2010 Financial Management Association International.

We examine the relative impact of Moody's and S&P ratings on bond yields and find that at issuance, yields on split rated bonds with superior Moody's ratings are about 8 basis points lower than yields on split rated bonds with superior S&P ratings. This suggests that investors differentiate between the two ratings and assign more weight to the ratings from Moody's, the more conservative rating agency. Moody's becomes more conservative after 1998 and the impact of a superior Moody's rating becomes stronger. Furthermore, the differential impact of the two ratings is more pronounced for the more opaque Rule 144A issues. Copyright (c) 2010 The Ohio State University.

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