'Best paper' to Negar Ghanbari

By Astri Inga Kamsvåg

24 August 2018 10:33

'Best paper' to Negar Ghanbari

PhD research fellow Negar Ghanbari won 'Best PhD Paper Award' at the International Finance and Banking Society (IFABS) conference 2018. The title of her paper is "Liquidity and the Use of Call Provision in the US Corporate Bond Market".

Negar is based at the Department of Finance, and her supervisors are professors Nils Friewald (main) and Karin Thorburn.

IFABS is one of the world's leading research networks dedicated to the promotion of cutting edge research in the areas of Banking and Finance.

Summary

In her paper Negar analyzes whether liquidity is an important determinant of the use of call provisions in the US corporate bond market.

A call provision is an option, which gives the issuer the right to redeem the bond before maturity at a pre-specified price. Callable bond has become an increasingly important part of the corporate bond market, to such an extent that most of the newly issued bonds in recent years include a call provision.

The focus of this paper is on understanding the relation between the use of call provision and liquidity risk. US corporate bond market is an OTC market and liquidity condition is a major concern in this market.

The analysis of this paper provides evidence that firms desire to include call provisions on their debt contracts as an efficient term to overcome lack of liquidity in the bond market.

It is often assumed that bond contracting is a one-time decision in which issuer chooses contract terms at issuance and then commits to it until the scheduled due date. One exception is the use of call provisions, which provide the firm the option to retire the debt and issue a new bond.

Consider a firm that needs financing (for instance to repay maturing debt or for general corporate purposes) when liquidity cost of debt is high. Under such conditions, including a call provision would allow the firm to redeem its outstanding debt early and replace it with a new one with better contract terms, such as lower interest rate, longer maturity or less restrictive covenants.

Negar uses a comprehensive database of newly issued corporate bonds over the period from 2004 to 2014. Employing several liquidity measures, Negar finds that the likelihood of using call provisions is positively related to bond illiquidity at the time of issuance.

Her findings also suggest that the likelihood of retiring a callable bond is positively linked to the improvements in bond liquidity. Moreover, Negar documents that the effect of liquidity improvement on redeeming callable bonds is intensified for the bonds issued during the subprime crisis.

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