Determinants of Corporate Call Policy for Convertible Bonds

Forthcoming, Journal of Corporate Finance

59 Pages Posted: 7 Aug 2009 Last revised: 17 Dec 2012

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance

David C. Mauer

University of North Carolina at Charlotte

Date Written: July 10, 2012

Abstract

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.

Keywords: Convertible Bond, Call Policy, Call Delay, Call Notice Period, Soft Call Provision

JEL Classification: G13, G30, G32

Suggested Citation

King, Tao-Hsien Dolly and Mauer, David C., Determinants of Corporate Call Policy for Convertible Bonds (July 10, 2012). Forthcoming, Journal of Corporate Finance. Available at SSRN: https://ssrn.com/abstract=1444099 or http://dx.doi.org/10.2139/ssrn.1444099

Tao-Hsien Dolly King

University of North Carolina (UNC) at Charlotte - Department of Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7652 (Phone)
704-687-6987 (Fax)

David C. Mauer (Contact Author)

University of North Carolina at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
704-687-7707 (Phone)

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