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What we do and do not know about convertible bond financing

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  • 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.

Suggested Citation

  • Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
  • Handle: RePEc:eee:corfin:v:24:y:2014:i:c:p:3-20
    DOI: 10.1016/j.jcorpfin.2013.10.009
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    Cited by:

    1. Lyandres, Evgeny & Zhdanov, Alexei, 2014. "Convertible debt and investment timing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 21-37.
    2. Lewis, Craig M. & Veld, Chris, 2014. "Convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 1-2.
    3. 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.
    4. repec:eee:empfin:v:44:y:2017:i:c:p:237-249 is not listed on IDEAS
    5. Li, Hui & Liu, Hong & Siganos, Antonios, 2016. "A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 356-366.
    6. Alberto Fuertes & José María Serena, 2016. "How firms borrow in international bond markets: securities regulation and market segmentation," Working Papers 1603, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

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

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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