Does the choice between fixed price and make whole call provisions reflect differential agency costs?

Top management incentives and financial flexibility: The case of make‐whole call provisions

“…The increasing prevalence of make‐whole callable bonds depicted in Figure 1 in our sample corroborates extant research documenting the growing usage of bonds with make‐whole provisions (e.g. Afik et al., 2019; Alderson et al., 2017; Brown & Powers, 2018; Elsaify & Roussanov, 2016). In aggregate, Panel A1 of Table 2 illustrates that about 59 percent of the bonds in this sample are make‐whole callable, 20 percent are fixed‐price callable, and 21 percent are non‐callable.…”

“…With exercise highly unlikely, the make‐whole call loses the capacity to mitigate asymmetric information or agency problems by limiting ex post wealth transfers to bondholders resulting from these situations. Consistent with this observation, Alderson, Lin, and Stock (2017) provide evidence that issuers with potential bondholder–shareholder agency conflicts are more likely to use fixed‐price call provisions rather than make‐whole provisions.…”

“…The bond‐ and firm‐level control variables broadly control for the financial flexibility, interest rate hedging, and other explanations for call provision choices explored in prior research and follow specifications used by Brown and Powers (2018) and related work including Alderson et al. (2017), Mann and Powers (2003), Powers and Tsyplakov (2008), and Skinner and Gounopoulos (2014). At the bond level, Log ( Time to maturity ) measures refinancing risk, while logged Offering amount controls for interest rate exposure (Chen et al., 2010).…”

“…with make-whole provisions (e.g. Elsaify and Roussanov, 2016;Brown and Powers, 2018;Alderson, Lin and Stock, 2017;Afik et al, 2019). In aggregate, Table 2 Panel A1 illustrates that about percent of the bonds in this sample are make-whole callable, 20 percent are fixed-price callable, and 21 percent are non-callable.…”

Analyzing interactive call, default, and conversion policies for corporate bonds

“…1 Bonds with call provisions also increased from 14% of the total issuance volume to nearly 88% in 2020, perhaps because callable bonds not only provide financial flexibility for borrowing firms (Banko & Zhou, 2010;S. Brown & Powers, 2020;Elton & Gruber, 1972) but also elicit better investment decisions benefiting both stockholder and bondholder (Alderson et al, 2017;Z. Chen et al, 2010;Schall & Siegel, 2016;Thatcher, 1985).…”