Convertible Debt and Preference Share Financing: An Empirical Study

Abstract

The factors affecting the decision to issue different hybrid securities are tested for the UK market. Support is found only for the sweetened debt theory and not found for the delayed equity or moral hazard theories for convertible debt. Weak support is found for the financial distress and taxation theories for preference shares. I conjecture this is due to the different taxation rates and bankruptcy codes between the US and the UK. Also companies are found to resort to any form of preference share financing when ordinary shares are undervalued. Unlike previous UK studies, hybrid security issuers are found to be significantly smaller than debt issuers.

Keywords: Convertible Debt, Preference Shares, Probit Analysis, Hybrid Securities, Capital Structure

JEL Classification: G32