The Choice Among Non-Callable and Callable Bonds

Abstract

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The buyers’ perspective on security design: Hedge funds and convertible bond call provisions

“…Importantly, we show that the relation between convertible arbitrage hedge funds and whether convertibles contain call provisions remains strong after controlling for year fixed effects. A further observation consistent with the importance of a factor applicable to the convertible market but not the market for straight debt 24 Convertible bonds that were issued after 1985 and ceased to exist before 1995 are not included in the Mergent FISD dataset (Booth, Gounopoulos, and Skinner, 2013). As a result, the average maturity of the pre-1995 issues in the Mergent database may be upward biased.…”

“…Additional explanations for call provisions considered in the straight debt literature include reductions of hold-up problems (Smith and Warner, 1979) and of costs related to information asymmetries (Barnea, Haugen, and Senbet, 1980;Robbins and Schatzberg, 12 There is disagreement in the literature about the relation between the level of interest rates and the probability of call provisions in straight debt issues. Unlike Kish and Livingston (1992) and Banko and Zhou (2010), studies by Sarkar (2003) and Booth, Gounopoulos, and Skinner (2013) report a negative relation between interest rates and call provision inclusion. 1986).…”