Determinants of Corporate Call Policy for Convertible Bonds
Tao-Hsien Dolly King
University of North Carolina (UNC) at Charlotte - Department of Finance
David C. Mauer
University of North Carolina at Charlotte
July 10, 2012
Forthcoming, Journal of Corporate Finance
For a sample of convertible bonds issued during the period 1980 through 2002, we empirically investigate the determinants of call policy. We find that the risk of a failed call over the call notice period helps explain why firms call only after conversion value exceeds call price by a substantial safety premium. We find strong evidence that cash flow considerations and a desire to mitigate agency conflicts influence call policy. We also find evidence that the decision to issue and subsequently call a convertible bond is influenced by a desire to obtain backdoor equity financing and to finance growth options. There is no evidence, however, that firms with favorable inside information are more likely to delay calls. Finally, we find that a significant portion of calls are associated with restructuring and merger activity, and with bond rating upgrades and downgrades. In these cases, there is little if any call delay.
Number of Pages in PDF File: 59
Keywords: Convertible Bond, Call Policy, Call Delay, Call Notice Period, Soft Call Provision
JEL Classification: G13, G30, G32
Date posted: August 7, 2009 ; Last revised: December 17, 2012
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