Do Nonrefunding Provisions Constrain Corporate Behavior? Evidence for Calls.

I examine corporate call policy for nonrefundable debt. Nonrefundable bonds purportedly cannot be called with funds from lower-interest-cost debt. However, firms tend to call nonrefundable debt following interest rate decreases. The calling firms typically issue lower-interest-cost debt around the time of the call and do not identify the source of funds used to call the debt. These actions show the weakness of the constraints imposed by the nonrefunding provision on firms' call policies and may have led to the abandonment of the provision in the early 1990s and the adoption of potentially superior contracting mechanisms. [ABSTRACT FROM AUTHOR]

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