PT  - JOURNAL ARTICLE
AU  - Tao-Hsien Dolly King
AU  - Taichun Piao
AU  - Cinder Xinde Zhang
TI  - Putable Bonds, Risk Shifting Problems, and Information Asymmetry
AID  - 10.3905/jfi.2022.1.135
DP  - 2022 Apr 20
TA  - The Journal of Fixed Income
PG  - jfi.2022.1.135
4099  - https://pm-research.com/content/early/2022/04/20/jfi.2022.1.135.short
4100  - https://pm-research.com/content/early/2022/04/20/jfi.2022.1.135.full
AB  - 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 non-convertible and non-callable. We find that putable bond issues span over the past four 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.