The issuance of callable bonds under information asymmetry

We reconsider the role of asymmetric information in motivating the issuance of callable bonds. The previous literature has emphasized a possibility that a call feature serves as a signal of issuer quality. We demonstrate that asymmetric information can motivate use of a call even when this action does not signal quality in equilibrium. We construct a matched sample of callable and non-callable bonds that permits us to control for non-informational effects on the call issuance decision. Empirical evidence from speculative grade bond markets is consistent with the hypotheses that asymmetric information motivates use of the call feature, but there is no evidence that inclusion of the call functions as a signal to the market.