Security Design of Callable Convertible Bonds and Issuers' External Financing Costs

ABSTRACT:Existing research argues that convertible bonds mitigate issuers’ external financing costs offinancial distress, agency conflicts and informational asymmetry. The purpose of this paper is totest whether callable convertible bonds are designed in response to costly debt- and equityrelatedfinancing problems. We identify the design (debt-, mixed- and equity-like) of callableconvertible bonds using a measure of conversion probability which accounts for callability.Indeed, most of the existing empirical financial literature on convertible debt design does notpay much attention to the call feature in spite of its important repercussions on the securitydesign. The empirical study provides evidence from 213 French callable convertible bonds overthe period 1990-2010 that the issuer features, and hence the offering motives vary with thedesign of callable convertible debt.