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Financing decisions: The case of convertible bonds

Author

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  • Del Viva, Luca
  • El Hefnawy, Menatalla

Abstract

Research studying firms' motivations to issue convertible bonds remains far from complete. This paper aims to provide further understanding of firms' motives behind issuing convertible bonds. We propose a theoretical model that explains issuers' choice between convertibles and equity when raising a required amount of capital by comparing the cash flow streams of both alternatives in order to maximize the firm's value for the current shareholders. We derive a closed form solution of our theoretical model both in absence and presence of default risk. Our model suggests that issuing convertible bonds is preferred to a direct stock issuance if the expected return of convertible bonds is lower than the expected return of common stocks. Empirical findings confirm our theoretical predictions.

Suggested Citation

  • Del Viva, Luca & El Hefnawy, Menatalla, 2020. "Financing decisions: The case of convertible bonds," International Review of Financial Analysis, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:finana:v:67:y:2020:i:c:s1057521918307919
    DOI: 10.1016/j.irfa.2019.101393
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    Cited by:

    1. Javadi, Siamak & Li, Weiping & Nejadmalayeri, Ali, 2023. "Contingent capital conversion under dual asset and equity jump–diffusions," International Review of Financial Analysis, Elsevier, vol. 89(C).
    2. Piotr Jaworski & Kamil Liberadzki & Marcin Liberadzki, 2021. "On Write-Down/ Write-Up Loss Absorbing Instruments," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 1204-1219.

    More about this item

    Keywords

    Convertible bonds; Equity; Hybrid instruments; Financing decisions; Credit risk;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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