Disappearing Call Delay and Dividend-Protected Convertible Bonds

38 Pages Posted: 29 Feb 2012 Last revised: 28 Apr 2015

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: April 28, 2015

Abstract

Firms have not historically called their convertible bonds as soon as conversion could be forced. A number of explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely that recent convertible bond issues are dividend-protected. Dividend protection means that the conversion value of the convertible bond is unaffected by dividend payments and dividend-related rationales for call delay become moot. We document that call delay is near zero for dividend-protected convertible bonds.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2579127

Keywords: call policy, dividend protection, convertible securities, security design

JEL Classification: G2, G32

Suggested Citation

Grundy, Bruce D. and Verwijmeren, Patrick, Disappearing Call Delay and Dividend-Protected Convertible Bonds (April 28, 2015). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2012958 or http://dx.doi.org/10.2139/ssrn.2012958

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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