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
Date Written: July 6, 2010
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: Suggested Citation