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Determinants of corporate call policy for convertible bonds

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  • King, Tao-Hsien Dolly
  • Mauer, David C.
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    Abstract

    For a sample of convertible bonds issued during the period 1980 through 2002, we empirically investigate the determinants of call policy. We find that the risk of a failed call over the call notice period helps explain why firms call only after conversion value exceeds call price by a substantial safety premium. We find strong evidence that cash flow considerations and a desire to mitigate agency conflicts influence call policy. We also find evidence that the decision to issue and subsequently call a convertible bond is influenced by a desire to obtain backdoor equity financing and to finance growth options. There is no evidence, however, that firms with favorable inside information are more likely to delay calls. Finally, we find that a significant portion of calls are associated with restructuring and merger activity, and with bond rating upgrades and downgrades. In these cases, there is little if any call delay.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Corporate Finance.

    Volume (Year): 24 (2014)
    Issue (Month): C ()
    Pages: 112-134

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    Handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:112-134

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    Web page: http://www.elsevier.com/locate/jcorpfin

    Related research

    Keywords: Convertible bond; Call policy; Call delay; Call notice period; Soft call provision;

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    References

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    Cited by:
    1. Dorion, Christian & Fran├žois, Pascal & Grass, Gunnar & Jeanneret, Alexandre, 2014. "Convertible debt and shareholder incentives," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 38-56.
    2. Bechmann, Ken L. & Lunde, Asger & Zebedee, Allan A., 2014. "In- and out-of-the-money convertible bond calls: Signaling or price pressure?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 135-148.
    3. Grundy, Bruce D. & Veld, Chris & Verwijmeren, Patrick & Zabolotnyuk, Yuriy, 2014. "Why are conversion-forcing call announcements associated with negative wealth effects?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 149-157.
    4. Lewis, Craig M. & Veld, Chris, 2014. "Convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 1-2.

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