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The Optimality of Call Provision Terms

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  • Eric Powers

    (Darla Moore School of Business, University of South Carolina, Columbia, South Carolina 29208)

Abstract

There is substantial variation in fixed-price call provision terms—call price premium and call protection. I investigate determinants of call price, call protection, and estimated call option value. Consistent with agency theory and asymmetric information models, I find that lower credit quality and opaque issuers choose higher call premiums, longer call protection, and overall less valuable call options. Higher-quality issuers, particularly financial institutions that struggle when interest rates are low, do the opposite.

Suggested Citation

  • Eric Powers, 2021. "The Optimality of Call Provision Terms," Management Science, INFORMS, vol. 67(10), pages 6581-6601, October.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:10:p:6581-6601
    DOI: 10.1287/mnsc.2020.3774
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