Time Value Expropriation and Convertible Bonds Calls
University of Bologna - Department of Management
Incontri di Finanza Aziendale, pp. 1-11, Egea, Milan, 2002
Most of convertible bonds are issued with a callability provision. This allows the issuer to redeem the bond before the maturity date, when, doubtlessly, this is economically convenient for the firm. According to Ingersoll's theory, this condition occurs as soon as convertible value reaches call price. As Ingersoll and many others scholars afterward noticed, although this is the optimal behavior, generally firms delay calls until the bond price is, in average, more than 40% above the call price, giving so a unjustified gift to bondholders. In the last 20 years several possible explanations in the literature have been proposed.
Looking at Italian experience, very few calls has been announced in the last years. To verify if this phenomenon can be considered as a strong inefficiency of Italian firms, I investigated a 14 years window, taking the whole universe of convertible bonds listed at Milan Stock Exchange from 1985 to 1998. In my sample of 85 convertible bond issues, I tested main existing theories, following a similar analysis conducted by Asquith (1995). However, a more complete explanation of call policies has been reached when we added in the analysis a new hypothesis: time value expropriation.
Number of Pages in PDF File: 17
Keywords: Convertible Bonds, Financial Structure, Options
JEL Classification: G10, G14, G32
Date posted: April 17, 2004