Time Value vs. Cost of Forcing Call: New Evidence on Convertible Bond Call Policy

33 Pages Posted: 23 May 2010 Last revised: 7 Jul 2010

See all articles by Emanuele Bajo

Emanuele Bajo

University of Bologna - Department of Economics

Massimiliano Barbi

University of Bologna - Department of Management

Date Written: July 6, 2010

Abstract

Since the seminal work of Ingersoll (1977b) the puzzle concerning the delay of convertible bond calls has seemingly been solved. Several studies have put forward a number of possible reasons to explain the apparent delay: dividend dilution, the risk of financial distress following a failed conversion, agency costs and tax shield, to cite the most unanimously agreed ones. However, we argue that an important advantage of convertible bond calls has been almost neglected: the time value-extraction from conversion option. By proposing a new measure for the effective convenience of calling — which we define as net time value advantage — we give a more comprehensive explanation of firms’ convertible bonds call policy.

Keywords: Convertible Bonds, Call Delay, Call Policy, Fixed Income

JEL Classification: G14, G32

Suggested Citation

Bajo, Emanuele and Barbi, Massimiliano, Time Value vs. Cost of Forcing Call: New Evidence on Convertible Bond Call Policy (July 6, 2010). Available at SSRN: https://ssrn.com/abstract=1607603 or http://dx.doi.org/10.2139/ssrn.1607603

Emanuele Bajo (Contact Author)

University of Bologna - Department of Economics ( email )

Bologna
Italy

Massimiliano Barbi

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

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