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Dividend-Protected Convertible Bonds and the Disappearance

Author

Listed:
  • Bruce D. Grundy

    (University of Melbourne)

  • Patrick Verwijmeren

    (VU University Amsterdam)

Abstract

Firms have not historically called their convertible bonds as soon as they could force conversion. Various explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely that more than 95 percent of recent convertible bond issues are dividend-protected. Dividend protection means that the conversion value of the shares into which a bond is convertible is unaffected by dividend payments and dividendrelated rationales for call delay become moot. We document that dividend-protected convertibles are called as soon as conversion can be forced.

Suggested Citation

  • Bruce D. Grundy & Patrick Verwijmeren, 2012. "Dividend-Protected Convertible Bonds and the Disappearance," Tinbergen Institute Discussion Papers 12-060/2/DSF37, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20120060
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    File URL: http://papers.tinbergen.nl/12060.pdf
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    References listed on IDEAS

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    Cited by:

    1. Finnerty, John D., 2015. "Valuing convertible bonds and the option to exchange bonds for stock," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 91-115.

    More about this item

    Keywords

    Call policy; Dividend protection; Convertible securities; Security design;

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • 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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