Putable Bonds, Risk-Shifting Problems, and Information Asymmetry

Abstract

This article presents an empirical examination of issuers’ motives to issue putable bonds using a comprehensive sample of putable and straight debt issues from 1976 to 2019. We focus on the regular putable bonds that are not tied to specific event risks and are nonconvertible and noncallable. We find that putable bond issues span over the past 4 decades and across industry groups. These bonds are smaller in offer size, are longer in maturity, and have fewer covenants than straight debt. Using Probit and Tobit regressions, we find that firms with greater risk-shifting incentives measured by market-to-book ratio and WW Index are more likely to issue putable bonds. We also find that issuers with a high level of information asymmetry are more likely to issue putables. Our findings suggest the put option can be viewed as an effective contracting term that helps attract bondholder interest and alleviate borrowing costs for issuers. Finally, we consider the simultaneity of the decisions on putable, covenants, and leverage and find further confirmation for the risk-shifting and information asymmetry hypothesis for putable issuances.