We use in-depth interviews with top corporate executives to examine why companies issue convertible bonds. We find that firms issue convertibles when they perceive these securities to be a cheaper form of financing than straight bonds and equity. A large-sample analysis of security offerings confirms this insight by highlighting feature-adjusted yield spreads as a significant determinant of the choice between convertibles and straight bonds, and equity misvaluation as a significant determinant of the choice between convertibles and equity. Our interviews also allow us to verify individual convertible bond theories. We obtain evidence for the theory that convertible bonds are more suitable than straight debt when management and investors disagree about the riskiness of the firm. However, risk shifting, sequential financing, and backdoor equity theories receive little or no support. Finally, our interviews provide strong evidence for the impact of investor demand and financial intermediaries on convertible bond issuance decisions, two factors under-explored by previous studies.
Why Do Firms Issue Convertible Bonds?
Part of the research for this paper was completed when Chris Veld was affiliated with the University of Stirling and the University of Glasgow and when he was visiting the University of Melbourne and the University of Tampa. We are grateful to all corporate executives who agreed to be interviewed for this study. We thank Zvika Afik, Hank Bessembinder, Michael Brennan, Francesco D'Acunto, Jean-Pierre Fenech, Eileen Fischer, Campbell Harvey, David Hirshleifer, Stuart Hyde, Marcus Ingram, Nadia Massoud, Joseph Mohr, Anna Nadolska, Roger Otten, Joao Quariguasi, Gordon Roberts, Chris Robinson, Anna Samsonova, Norman Strong, Sheridan Titman, John Vaz, Yulia Veld-Merkoulova, Fiona Wilson, and participants at the 2011 European Financial Management Association conference, the 2011 Multinational Finance Society conference, the 2011 Western Economic Association International conference, the 24th Australasian Finance and Banking conference, the 2013 Financial Management Association conference, the 2013 Northern Finance Association conference, and seminars at University of St. Andrews, University of Exeter, University of Maastricht, Simon Fraser University, University of Stirling, and University of Tampa for helpful comments and suggestions. Special thanks go to Ivo Welch (the editor) and two anonymous referees for their very helpful comments and suggestions. We also gratefully acknowledge the research assistance of Andréanne Tremblay, Shiu-Yik Au, and Neeru Chaudhry, the assistance of Amina Abbas Gheewala, Donna McKendrick, and Jessica McKinley in transcribing the interviews, and the financial support of the Social Sciences and Humanities Research Council of Canada (SSHRC), the Institute of Chartered Accountants of Scotland, and the Carnegie Trust for Universities of Scotland.
Dong M, Dutordoir M, Veld C (2018), "Why Do Firms Issue Convertible Bonds?". Critical Finance Review, Vol. 7 No. 1 pp. 111–164, doi: https://doi.org/10.1561/104.00000048
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