AN EMPIRICAL-ANALYSIS OF THE FACTORS INFLUENCING CALL DECISIONS OF LOCAL-GOVERNMENT BONDS

This study examines possible motives underlying inclusion and exercise of call provisions in municipal debt. Based on these motives, specific hypotheses concerning the role of these factors have been developed and empirically tested. The results obtained are consistent with information asymmetry between issuers and lenders in municipal bond markets being a possible reason for the inclusion of call provisions in municipal debt. Also, political factors appear to influence the call decision. The results imply that financial decision making in the public sector is influenced both by economic and political considerations, and suggest that the effectiveness of existing monitoring mechanisms in the public sector needs further examination.