The Influence of Market Conditions on Poison Put Use in Convertible Bonds

The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 13-26, 2010

14 Pages Posted: 9 Sep 2010

See all articles by Claudia S. Kocher

Claudia S. Kocher

University of Michigan at Dearborn - School of Management

Hei Wai Lee

University of Michigan at Dearborn - School of Management

Karen Strandholm

University of Michigan at Dearborn

Date Written: 2010

Abstract

The objective of this study is to increase understanding of why poison put covenants are included in convertible bond contracts. We compare characteristics of convertible bond issuers who used poison puts with those who did not for the period from 1986 to 2002. We focus our analysis on two sub periods, 1988-1990 and 1991-1998, which were characterized by dramatically different financial market conditions. Our results show that almost all convertible bond issuers used poison put covenants during the late 1980s, a period of extremely high event risk. In contrast, poison put users differed from nonusers during the sub period of 1991-1998, with users having lower operating profit margins and higher capital expenditure ratios than nonusers. Given recent growing interest in bond covenants that address event risk, the findings of this study provide useful insights to practitioners.

Keywords: Poison put provisions, Change of control covenants, Convertible bonds

JEL Classification: G24, G32

Suggested Citation

Kocher, Claudia S. and Lee, Hei Wai and Strandholm, Karen, The Influence of Market Conditions on Poison Put Use in Convertible Bonds (2010). The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 13-26, 2010, Available at SSRN: https://ssrn.com/abstract=1667012

Claudia S. Kocher

University of Michigan at Dearborn - School of Management ( email )

4901 Evergreen Road
Dearborn, MI 48128-1491
United States

Hei Wai Lee (Contact Author)

University of Michigan at Dearborn - School of Management ( email )

4901 Evergreen Road
Dearborn, MI 48128-1491
United States
313-593-5524 (Phone)
313-593-5636 (Fax)

Karen Strandholm

University of Michigan at Dearborn ( email )

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