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Covenants in convertible bonds: Boon or boilerplate?

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  • Dutordoir, Marie
  • Pappas, Kostas
  • Xu, Alice Liang
  • Zeng, Cheng (Colin)

Abstract

This paper examines the role of restrictive covenants in convertible bonds. After controlling for standard covenant intensity determinants, an average convertible bond offering has 3.21 fewer covenants than an average straight bond offering. While covenants negatively affect straight bond yields, there is no negative association between covenants and convertible bond yields. Moreover, contrary to straight bond covenants, convertible bond covenants are set largely independently of issuer characteristics. Overall, our findings suggest that the conversion option and certain covenants are substitutes for addressing debt-related financing costs. The few covenants included in convertibles represent irrelevant boilerplate clauses.

Suggested Citation

  • Dutordoir, Marie & Pappas, Kostas & Xu, Alice Liang & Zeng, Cheng (Colin), 2023. "Covenants in convertible bonds: Boon or boilerplate?," Journal of Corporate Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:corfin:v:80:y:2023:i:c:s092911992300041x
    DOI: 10.1016/j.jcorpfin.2023.102392
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    More about this item

    Keywords

    Convertible bonds; Straight bonds; Restrictive covenants; Agency costs; Yields;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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