Callable Bonds: A Risk‐Reducing Signalling Mechanism

Abstract

The theory of financial economics has failed to distinguish advantages of callable bonds from those of short‐term debt. This paper shows that either type of borrowing can signal a firm's better prospects but that short‐term debt does so at the cost of weakened risk‐sharing with capital markets. By issuing either equity or long‐term, non‐callable debt, a firm with poor investment opportunities will not pool its prospects with those of a better firm. But equity produces superior risk‐sharing. Perhaps this explains the almost complete absence of long‐term, non‐callable bonds from observed corporate capital structures.

Make-whole call provisions: A case of “much ado about nothing?”

“…Thus, rational stock investors may interpret the decision to include a call as information that the firm, in fact, has strong future prospects whereas the lack of a call could be interpreted to mean the firm has weaker prospects. Robbins and Schatzberg (1986) and Wall (1988) present different perspectives on this signaling argument. A signaling interpretation is also consistent with Mitchell (1991) who finds that firms facing asymmetric information and financing high quality projects choose to include call features in their bond issuances.…”

Proposing the Affect-Trust Infusion Model (ATIM) to explain and predict the influence of high and low affect infusion on Web vendor trust

“…We support this claim with the theoretical literature on signaling theory by explaining that a web vendor can embed signals into its website to communicate its own quality and abilities; and, therefore, establish trust not only in its website, but also in itself. The signaling theory framework has been applied in fields such as finance (Benartzi et al, 1997;Robbins & Schatzberg, 1986), marketing (Boulding & Kirmani, 1993;Kirmani, 1997;Kirmani & Rao, 2000;Rao et al, 1999), and management (Certo, 2003;Connelly et al, 2011;Turban & Greening, 1997) to explain how a seller can overcome the constraints of limited or hidden information in precontractual (prepurchase or pretransactional) settings. Beyond business, signaling theory has received much attention in disciplines ranging from "anthropology to zoology" (Connelly et al, 2011, p. 40).…”

Costly information production and optimal capital structuring: Theory and implications for finance and accounting

“…Thus, we will not be able to use the solution techniques of differential optimization and differential equations methodologies that are based upon the calculus of variations and optimal control theory. Nevertheless, basing financial theory upon discrete-outcome models is hardly without precedent (e.g., Rothschild and Stiglitz (1976) have employed binary-state outcomes in an adverse-selection model of insurance contracting, and Robbins and Schatzberg (1986) have utilized a discrete-outcome framework in order to investigate the consequences of including call provisions in bond contracts). It may be possible to generalize our techniques to include (denumerably or uncountably) infinite state spaces.…”