Advanced Search
MyIDEAS: Login to save this paper or follow this series

The consequences of issuing convertible bonds: dilution and/or financial restructuring?

Contents:

Author Info

  • Roland Gillet
  • Hubert de La Bruslerie

Abstract

Historically, most convertible bond (CB) issues have been converted to equity sooner or later. The announcement of a CB issue will bring about a future dilution of the firm's capital, and is often followed by a drop in share price. However, a CB issue by itself creates future value for the shareholders if it enables the firm to make profitable investments. It can also issue a positive signal regarding the restructuring of the firm's financial liabilities and its attempts to optimise its financial structure. These positive effects, if they occur, will develop gradually after the issue, and cannot be identified by a simple short-term event analysis of a CB issue announcement. In this paper, we test the significance of the dilution effect, coupled with a possible value creation effect, using data from the French stock market. We introduce a comparison between dilutive convertibles and nondilutive exchangeable bonds. By integrating different corrections and by selecting a window of analysis over a longer period after the announcement of the issue, we show that the negative cumulative average abnormal returns generally observed in previous studies become non-significant. This absence of global incidence is indicative of large differences in individual behaviour by issuers of CBs, and leads us to take into account the strategic choices linked to the issue of a CB. Two goals, often described as ‘investment financing' or ‘financial restructuring', may exist when issuing, and may appear to explain the size of the abnormal returns.

(This abstract was borrowed from another version of this item.)

Download Info

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series ULB Institutional Repository with number 2013/14178.

as in new window
Length:
Date of creation: 2010
Date of revision:
Publication status: Published in: European Financial Management (2010) v.16 n° 4,p.552-584
Handle: RePEc:ulb:ulbeco:2013/14178

Contact details of provider:
Postal: CP135, 50, avenue F.D. Roosevelt, 1050 Bruxelles
Web page: http://difusion.ulb.ac.be
More information through EDIRC

Related research

Keywords:

Other versions of this item:

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. Eckbo, B. Espen & Masulis, Ronald W. & Norli, Oyvind, 2000. "Seasoned public offerings: resolution of the 'new issues puzzle'," Journal of Financial Economics, Elsevier, Elsevier, vol. 56(2), pages 251-291, May.
  2. Lee, Inmoo & Loughran, Tim, 1998. "Performance following convertible bond issuance," Journal of Corporate Finance, Elsevier, Elsevier, vol. 4(2), pages 185-207, June.
  3. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, Elsevier, vol. 14(1), pages 3-31, March.
  4. Mark L. Mitchell & Erik Stafford, 1997. "Managerial Decisions and Long-Term Stock Price Performance," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 453, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  5. Jun-Koo Kang & Rene M. Stulz, 1994. "How Different is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," NBER Working Papers 4908, National Bureau of Economic Research, Inc.
  6. Ammann, Manuel & Kind, Axel & Wilde, Christian, 2003. "Are convertible bonds underpriced? An analysis of the French market," Journal of Banking & Finance, Elsevier, Elsevier, vol. 27(4), pages 635-653, April.
  7. Abhyankar, Abhay & Ho, Keng-Yu, 2006. "Long-run abnormal performance following convertible preference share and convertible bond issues: New evidence from the United Kingdom," International Review of Economics & Finance, Elsevier, Elsevier, vol. 15(1), pages 97-119.
  8. Kim, Yong-Cheol & Stulz, Rene M, 1992. "Is There a Global Market for Convertible Bonds?," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 65(1), pages 75-91, January.
  9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 187-221, June.
  10. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(1), pages 115-136, March.
  11. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Hansen, Robert S & Crutchley, Claire, 1990. "Corporate Earnings and Financings: An Empirical Analysis," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 63(3), pages 347-71, July.
  13. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  14. Jun-Koo Kang & Yong-Cheol Kim & Rene M. Stulz, 1996. "The Underreaction Hypothesis and the New Issue Puzzle: Evidence from Japan," NBER Working Papers 5819, National Bureau of Economic Research, Inc.
  15. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, Elsevier, vol. 32(1), pages 3-21, August.
  16. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, American Finance Association, vol. 51(2), pages 425-61, June.
  17. Agrawal, Anup & Jaffe, Jeffrey F & Mandelker, Gershon N, 1992. " The Post-merger Performance of Acquiring Firms: A Re-examination of an Anomaly," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1605-21, September.
  18. Eugene F Fama, . "Market Efficiency, Long-Term Returns, and Behavioral Finance," CRSP working papers, Center for Research in Security Prices, Graduate School of Business, University of Chicago 448, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  19. Schultz, Paul, 1993. "Unit initial public offerings *1: A form of staged financing," Journal of Financial Economics, Elsevier, Elsevier, vol. 34(2), pages 199-229, October.
  20. Alan Gregory, 1997. "An Examination of the Long Run Performance of UK Acquiring Firms," Journal of Business Finance & Accounting, Wiley Blackwell, Wiley Blackwell, vol. 24(7&8), pages 971-1002.
  21. Ammann, Manuel & Fehr, Martin & Seiz, Ralf, 2006. "New evidence on the announcement effect of convertible and exchangeable bonds," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 16(1), pages 43-63, February.
  22. Frankle, Alan W & Hawkins, C A, 1975. "Beta Coefficients for Convertible Bonds," Journal of Finance, American Finance Association, American Finance Association, vol. 30(1), pages 207-10, March.
  23. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, Elsevier, vol. 52(1), pages 45-67, October.
  24. Davidson, Wallace N. & Glascock, John L. & Schwarz, Thomas V., 1995. "Signaling with Convertible Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 30(03), pages 425-440, September.
  25. Asquith, Paul & Mullins, David Jr., 1986. "Equity issues and offering dilution," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(1-2), pages 61-89.
  26. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, American Economic Association, vol. 76(2), pages 323-29, May.
  27. Mehta, Dileep R & Khan, A Qayyum, 1995. "Convertible Bond Issues: Evidence from Security Markets," The Financial Review, Eastern Finance Association, Eastern Finance Association, vol. 30(4), pages 781-807, November.
  28. Edith Ginglinger & Jean-François Gajewski, 2002. "Seasoned equity issues in a closely held market: evidence from France," Post-Print, HAL halshs-00138293, HAL.
  29. Dann, Larry Y. & Mikkelson, Wayne H., 1984. "Convertible debt issuance, capital structure change and financing-related information : Some new evidence," Journal of Financial Economics, Elsevier, Elsevier, vol. 13(2), pages 157-186, June.
Full references (including those not matched with items on IDEAS)

Citations

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:ulb:ulbeco:2013/14178. 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: (Benoit Pauwels).

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.