Advanced Search
MyIDEAS: Login to save this article or follow this journal

What we do and do not know about convertible bond financing

Contents:

Author Info

  • Dutordoir, Marie
  • Lewis, Craig
  • Seward, James
  • Veld, Chris

Abstract

We review the literature on the issuance motives, shareholder wealth effects, and design of convertible bonds. Empirical studies on convertible debt issuance mainly focus on testing the predictions of four traditional theoretical models based on convertibles' potential to mitigate agency or adverse selection costs, and obtain mixed evidence. Recent studies on shareholder wealth effects of convertible bond issues highlight the need to control for arbitrage-related short selling and post-issuance risk changes. Studies on the determinants of convertible bond design uncover earnings management, as well as catering incentives to convertible arbitrage funds, as important determinants of innovations in convertible bond characteristics. Overall, our review indicates that recent empirical research on convertible debt provides valuable insights into issue motives and determinants of financial innovations, but also considers the broader question of how investor demand characteristics impact corporate finance decisions. We conclude with an overview of potential research questions to be addressed by future research on hybrid securities.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0929119913001089
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

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

Volume (Year): 24 (2014)
Issue (Month): C ()
Pages: 3-20

as in new window
Handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:3-20

Contact details of provider:
Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Convertible bond financing; Agency costs; Asymmetric information; Convertible arbitrage;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Susheng Wang, 2009. "Convertibles in Sequential Financing," Review of Finance, European Finance Association, vol. 13(4), pages 727-760.
  2. Jeremy C. Stein, 1992. "Convertible Bonds as "Back Door" Equity Financing," NBER Working Papers 4028, National Bureau of Economic Research, Inc.
  3. Lewis, Craig M. & Rogalski, Richard J. & Seward, James K., 2003. "Industry conditions, growth opportunities and market reactions to convertible debt financing decisions," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 153-181, January.
  4. Choi, Darwin & Getmansky, Mila & Tookes, Heather, 2009. "Convertible bond arbitrage, liquidity externalities, and stock prices," Journal of Financial Economics, Elsevier, vol. 91(2), pages 227-251, February.
  5. Lewis, Craig & Verwijmeren, Patrick, 2014. "Cash-settled convertible bonds and the value relevance of their accounting treatment," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 101-111.
  6. Brounen, Dirk & de Jong, Abe & Koedijk, Kees, 2006. "Capital structure policies in Europe: Survey evidence," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1409-1442, May.
  7. Kang, Jun-Koo & Stulz, Rene M, 1996. "How Different Is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 109-39.
  8. Lewis, Craig M. & Rogalski, Richard J. & Seward, James K., 2002. "Risk changes around convertible debt offerings," Journal of Corporate Finance, Elsevier, vol. 8(1), pages 67-80, January.
  9. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
  10. Dutordoir, Marie & Van de Gucht, Linda, 2007. "Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2828-2846, September.
  11. Christian Dorion & Pascal François & Gunnar Grass & Alexandre Jeanneret, 2014. "Convertible Debt and Shareholder Incentives," Cahiers de recherche 1403, CIRPEE.
  12. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  13. Lewis, Craig M. & Rogalski, Richard J. & Seward, James K., 1998. "Agency Problems, Information Asymmetries, and Convertible Debt Security Design," Journal of Financial Intermediation, Elsevier, vol. 7(1), pages 32-59, January.
  14. Eugene F. Brigham, 1966. "An Analysis Of Convertible Debentures: Theory And Some Empirical Evidence," Journal of Finance, American Finance Association, vol. 21(1), pages 35-54, 03.
  15. Carol Marquardt & Christine Wiedman, 2005. "Earnings Management through Transaction Structuring: Contingent Convertible Debt and Diluted Earnings per Share," Journal of Accounting Research, Wiley Blackwell, vol. 43(2), pages 205-243, 05.
  16. Ammann, Manuel & Fehr, Martin & Seiz, Ralf, 2006. "New evidence on the announcement effect of convertible and exchangeable bonds," Journal of Multinational Financial Management, Elsevier, vol. 16(1), pages 43-63, February.
  17. Henderson, Brian J. & Zhao, Bo, 2014. "More than meets the eye: Convertible bond issuers' concurrent transactions," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 57-79.
  18. Alex W. H. Chan & Nai-fu Chen, 2007. "Convertible Bond Underpricing: Renegotiable Covenants, Seasoning, and Convergence," Management Science, INFORMS, vol. 53(11), pages 1793-1814, November.
  19. Dutordoir, Marie & Strong, Norman & Ziegan, Marius C., 2014. "Does corporate governance influence convertible bond issuance?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 80-100.
  20. de Jong, Abe & Dutordoir, Marie & Verwijmeren, Patrick, 2011. "Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation," Journal of Financial Economics, Elsevier, vol. 100(1), pages 113-129, April.
  21. Brian J. Henderson & Heather Tookes, 2012. "Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues," Management Science, INFORMS, vol. 58(12), pages 2272-2291, December.
  22. Rongbing Huang & Gabriel G. Ramírez, 2010. "Speed of Issuance, Lender Specialization, and the Rise of the 144A Debt Market," Financial Management, Financial Management Association International, vol. 39(2), pages 643-673, 06.
  23. Davidson, Wallace N. & Glascock, John L. & Schwarz, Thomas V., 1995. "Signaling with Convertible Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(03), pages 425-440, September.
  24. Lewis, Craig M. & Verwijmeren, Patrick, 2011. "Convertible security design and contract innovation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 809-831, September.
  25. Archishman Chakraborty & Bilge Yilmaz, 2011. "Adverse Selection and Convertible Bonds," Review of Economic Studies, Oxford University Press, vol. 78(1), pages 148-175.
  26. Bayless, Mark & Chaplinsky, Susan, 1996. " Is There a Window of Opportunity for Seasoned Equity Issuance?," Journal of Finance, American Finance Association, vol. 51(1), pages 253-78, March.
  27. Darwin Choi & Mila Getmansky & Brian Henderson & Heather Tookes, 2010. "Convertible Bond Arbitrageurs as Suppliers of Capital," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2492-2522, June.
  28. Ammann, Manuel & Kind, Axel & Seiz, Ralf, 2010. "What drives the performance of convertible-bond funds?," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2600-2613, November.
  29. Lee, Inmoo & Loughran, Tim, 1998. "Performance following convertible bond issuance," Journal of Corporate Finance, Elsevier, vol. 4(2), pages 185-207, June.
  30. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  31. Mark Mitchell & Todd Pulvino & Erik Stafford, 2004. "Price Pressure around Mergers," Journal of Finance, American Finance Association, vol. 59(1), pages 31-63, 02.
  32. Ingersoll, Jonathan E, Jr, 1977. "An Examination of Corporate Call Policies on Convertible Securities," Journal of Finance, American Finance Association, vol. 32(2), pages 463-78, May.
  33. Fields, L Paige & Mais, Eric L, 1991. " The Valuation Effects of Private Placements of Convertible Debt," Journal of Finance, American Finance Association, vol. 46(5), pages 1925-32, December.
  34. 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.
  35. Hillion, Pierre & Vermaelen, Theo, 2004. "Death spiral convertibles," Journal of Financial Economics, Elsevier, vol. 71(2), pages 381-415, February.
  36. Murray Carlson & Adlai Fisher & Ron Giammarino, 2004. "Corporate Investment and Asset Price Dynamics: Implications for the Cross-section of Returns," Journal of Finance, American Finance Association, vol. 59(6), pages 2577-2603, December.
  37. Burlacu, Radu, 2000. "New evidence on the pecking order hypothesis: the case of French convertible bonds," Journal of Multinational Financial Management, Elsevier, vol. 10(3-4), pages 439-459, December.
  38. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, vol. 13(1), pages 115-136, March.
  39. Mayers, David, 1998. "Why firms issue convertible bonds: the matching of financial and real investment options," Journal of Financial Economics, Elsevier, vol. 47(1), pages 83-102, January.
  40. Franck Bancel & Usha R. Mittoo, 2004. "Why Do European Firms Issue Convertible Debt?," European Financial Management, European Financial Management Association, vol. 10(2), pages 339-373.
  41. Isagawa, Nobuyuki, 2002. "Callable convertible debt under managerial entrenchment," Journal of Corporate Finance, Elsevier, vol. 8(3), pages 255-270, July.
  42. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  43. Mitchell, Mark & Pedersen, Lasse Heje & Pulvino, Todd, 2007. "Slow Moving Capital," CEPR Discussion Papers 6117, C.E.P.R. Discussion Papers.
  44. Timo P. Korkeamaki & William T. Moore, 2004. "Convertible Bond Design and Capital Investment: The Role of Call Provisions," Journal of Finance, American Finance Association, vol. 59(1), pages 391-405, 02.
  45. Dorion, Christian & François, Pascal & Grass, Gunnar & Jeanneret, Alexandre, 2014. "Convertible debt and shareholder incentives," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 38-56.
  46. Zeidler, Felix & Mietzner, Mark & Schiereck, Dirk, 2012. "Risk dynamics surrounding the issuance of convertible bonds," Journal of Corporate Finance, Elsevier, vol. 18(2), pages 273-290.
  47. Thomas J. Chemmanur & Karen Simonyan, 2010. "What Drives the Issuance of Putable Convertibles: Risk-Shifting, Asymmetric Information, or Taxes?," Financial Management, Financial Management Association International, vol. 39(3), pages 1027-1068, 09.
  48. Zeidler, F. & Mietzner, M. & Schiereck, D., 2012. "Risk Dynamics Surrounding the Issuance of Convertible Bonds," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56450, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
  49. Yuriy Zabolotnyuk & Robert Jones & Chris Veld, 2010. "An Empirical Comparison of Convertible Bond Valuation Models," Financial Management, Financial Management Association International, vol. 39(2), pages 675-706, 06.
  50. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  51. Brennan, Michael J & Kraus, Alan, 1987. " Efficient Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 42(5), pages 1225-43, December.
  52. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
  53. Duca, Eric & Dutordoir, Marie & Veld, Chris & Verwijmeren, Patrick, 2012. "Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2884-2899.
  54. Koziol, Christian & Lawrenz, Jochen, 2012. "Contingent convertibles. Solving or seeding the next banking crisis?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 90-104.
  55. Kim, Yong O., 1990. "Informative Conversion Ratios: A Signalling Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(02), pages 229-243, June.
  56. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December.
  57. Korkeamaki, Timo P., 2005. "Effects of law on corporate financing practices--international evidence from convertible bond issues," Journal of Corporate Finance, Elsevier, vol. 11(5), pages 809-831, October.
  58. Agarwal, Vikas & Fung, William H. & Loon, Yee Cheng & Naik, Narayan Y., 2011. "Risk and return in convertible arbitrage: Evidence from the convertible bond market," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 175-194, March.
  59. Franck Bancel & Usha R. Mittoo, 2004. "Cross-Country Determinants of Capital Structure Choice: A Survey of European Firms," Financial Management, Financial Management Association, vol. 33(4), Winter.
  60. Stephen J. Brown & Bruce D. Grundy & Craig M. Lewis & Patrick Verwijmeren, 2012. "Convertibles and Hedge Funds as Distributors of Equity Exposure," Review of Financial Studies, Society for Financial Studies, vol. 25(10), pages 3077-3112.
  61. Chang, Shao-Chi & Chen, Sheng-Syan & Liu, Yichen, 2004. "Why firms use convertibles: A further test of the sequential-financing hypothesis," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1163-1183, May.
  62. Nyborg Kjell G., 1995. "Convertible Debt as Delayed Equity: Forced versus Voluntary Conversion and the Information Role of Call Policy," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 358-395, October.
  63. Krishnaswami, Sudha & Yaman, Devrim, 2008. "The role of convertible bonds in alleviating contracting costs," The Quarterly Review of Economics and Finance, Elsevier, vol. 48(4), pages 792-816, November.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Dutordoir, Marie & Strong, Norman & Ziegan, Marius C., 2014. "Does corporate governance influence convertible bond issuance?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 80-100.
  2. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
  3. Lewis, Craig M. & Veld, Chris, 2014. "Convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 1-2.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:3-20. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.