Market Reactions To Callable And Noncallable Debt Issues

Abstract

Financial theory claims that issuing callable debt rather than noncallable debt offers substantial advantages to the issuing firms. Yet our evidence shows that a substantial amount of noncallable debt exists, suggesting a deficiency in the theory. Our event study analysis found that market reactions to callable bond issues were not significantly different from zero. Thus, the prevalent claim that callable debt offers an advantage over noncallable debt is not supported. The market was found to reach negatively the issuance of noncallable debt, short-term noncallable debit, short-term callable debt, and short-term debt. Therefore, short-term bonds appear to be a signal of negative private information and long-term debt issues appear to be a signal of positive information.