Why Do Firms Issue Convertible Bonds? Evidence from the Field

52 Pages Posted: 12 Aug 2011 Last revised: 29 Jul 2017

See all articles by Ming Dong

Ming Dong

York University - Schulich School of Business

Marie Dutordoir

University of Manchester - Manchester Business School

Chris Veld

Monash University

Date Written: May 2, 2011

Abstract

We conduct interviews with financial managers in Australia, Canada, the U.K., and the U.S. to study the question why companies issue convertible bonds. For the vast majority of the firms, convertible bonds are chosen because managers find straight debt too costly. Convertible bonds are preferred to equity either because of the pecking order or because of managers’ perceived equity undervaluation and share dilution. Our results suggest that managers time the issuance of convertible bonds based on the demand of the investors and the misvaluation of the firms’ debt and equity. The evidence lends considerable support to the theory of management-investor differences in opinion about firm’s risk, but yields very little support to the theories of risk shifting, sequential financing, or backdoor equity.

Keywords: Convertible Debt, Interviews and Survey, Market Misvaluation, Investor Demand, Hedge Funds, Investment Banks

JEL Classification: G32, G13, G24

Suggested Citation

Dong, Ming and Dutordoir, Marie and Veld, Chris, Why Do Firms Issue Convertible Bonds? Evidence from the Field (May 2, 2011). Available at SSRN: https://ssrn.com/abstract=1908476 or http://dx.doi.org/10.2139/ssrn.1908476

Ming Dong

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

Marie Dutordoir (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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