Calling Nonconvertible Debt and the Problem of Related Wealth Transfer Effect

An often-cited rule in corporate finance is that a firm should call a bond as soon as the bond's market price equals its call price. But, in fact, many callable bonds sell for more than their call prices. One explanation is that the implicit assumption that calls are executed so as to leave capital structure unchanged fails to hold in practice. This paper examines the impact of capital structure changes on optimal call policy and presents empirical evidence consistent with the results of that explanation.