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Convertible Bond Design and Capital Investment: The Role of Call Provisions

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  • Timo P. Korkeamaki
  • William T. Moore

Abstract

If firms issue convertible securities to facilitate sequential investment, the securities should be engineered to give sufficient flexibility to accommodate timing of follow-on investment. We examine call provisions in convertible bonds and argue that firms with investment options expected to expire sooner (later) will offer weaker (stronger) call protection. We find that issues with weak or no call protection are offered by firms that invest greater amounts soon after issuance than those issuing convertibles with strong protection. Moreover, capital expenditure levels during the 5-year period following issuance are inversely related to the length of call-protection periods. Copyright 2004 by The American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 1 (02)
Pages: 391-405

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Handle: RePEc:bla:jfinan:v:59:y:2004:i:1:p:391-405

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Cited by:
  1. Pascal Fran├žois & Georges Hubner & Nicolas Papageorgiou, 2009. "A Dynamic Model of Risk-Shifting Incentives with Convertible Debt," Cahiers de recherche 0930, CIRPEE.
  2. Vaihekoski, Mika, 2008. "History of finance research and education in Finland: The first thirty years," Research Discussion Papers 18/2008, Bank of Finland.
  3. repec:dgr:uvatin:2012060 is not listed on IDEAS
  4. Dutordoir, M.D.R.P. & van de Gucht, L., 2006. "Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity?," ERIM Report Series Research in Management ERS-2006-056-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
  5. Yagi, Kyoko & Takashima, Ryuta, 2012. "The impact of convertible debt financing on investment timing," Economic Modelling, Elsevier, vol. 29(6), pages 2407-2416.
  6. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
  7. Eisdorfer, Assaf & Giaccotto, Carmelo & White, Reilly, 2013. "Capital structure, executive compensation, and investment efficiency," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 549-562.
  8. Korkeamaki, Timo & Moore, William T., 2004. "Capital investment timing and convertible debt financing," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 75-85.
  9. Polwat Lerskullawat, 2013. "Warrant Seos in an Emerging Market: Evidence from Thailand," Diversity, Technology, and Innovation for Operational Competitiveness: Proceedings of the 2013 International Conference on Technology Innovation and Industrial Management, ToKnowPress.
  10. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
  11. Bruce D. Grundy & Patrick Verwijmeren, 2012. "Dividend-Protected Convertible Bonds and the Disappearance," Tinbergen Institute Discussion Papers 12-060/2/DSF37, Tinbergen Institute.
  12. Lewis, Craig M. & Verwijmeren, Patrick, 2011. "Convertible security design and contract innovation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 809-831, September.
  13. Alderson, Michael J. & Betker, Brian L. & Stock, Duane R., 2006. "Investment and financing activity following calls of convertible bonds," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 895-914, March.
  14. Mika Vaihekoski, 2011. "History of financial research and education in Finland," The European Journal of Finance, Taylor & Francis Journals, vol. 17(5-6), pages 339-354.

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