Call feature and corporate bond yield spreads

• We examine the call spread in a global framework.
• Callable bonds have a positive call spread.
• Junk callable bonds have a higher call spread than investment-grade callable bonds.
• Highly leveraged firms have a higher call spread than firms with low leverage.

Callable bonds offer higher yields compared to non-callable bonds. In this paper, we examine the call spread in a global framework, while controlling for firm-level, bond-level, and country-level variables. Using an international sample of 13,936 bonds issued between 1991 and 2007, we find that callable bonds have a positive call spread, which is statistically and economically significant. Our empirical results hold after a battery of robustness checks. We also find that junk callable bonds have a higher call spread than investment-grade callable bonds, which is consistent with the signaling theory. The empirical results also show that highly leveraged firms have a higher call spread than firms with low leverage, a finding that is consistent with the risk-shifting arguments.