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

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