Convertible Bond Design and Long-Run Operating Performance
The International Journal of Business and Finance Research, Vol. 4, No. 3, pp. 17-30, 2011
14 Pages Posted: 4 Jul 2011
Date Written: 2010
This paper examines the influence of bond design on the long-run operating performance of convertible bond issuers and the determinants of this performance. Bonds are classified as equity-like and debt-like according to their probability of conversion at the time of the issue. The measure of long-run operating performance is the pre-tax cash flows of the firm. The results show that in the three years before the offering equity-like convertibles have better performance than debt-like convertibles while the performance in the three years after the offering is similar for the two groups of firms. The results also show that the factors that determine the long-run operating performance of equity-like and debt-like offerings are different. For example, the rating of the bond issued has a more positive influence on the performance of equity-like issues compared to debt-like issues. The level of information asymmetry, on the other hand, has a more negative influence on the performance of equity-like issues. The study contributes to the literature by incorporating convertible bond design into the study of the long-run operating performance of these bonds.
Keywords: convertible bonds, long-run performance, operating performance, bond design
JEL Classification: G31, G32
Suggested Citation: Suggested Citation