Why Do Companies Issue Convertible Bonds? A Review of Theory and Empirical Evidence

34 Pages Posted: 21 Sep 2006

See all articles by Igor Loncarski

Igor Loncarski

University of Ljubljana - Faculty of Economics

Jenke ter Horst

TIAS School for Business and Society

Chris Veld

Monash University

Date Written: October 9, 2005

Abstract

The literature on the motives for the issuance of convertible debt is reviewed. This literature shows a large discrepancy between theory and practice. Surveys show that managers base their motives for the use of convertible debt on factors that are irrational according to the theoretical literature. This theoretical literature in turn offers a number of rational motives. These motives are based on the resolution of the problems of informational asymmetry and agency costs, on tax motivations and managerial entrenchment arguments. Most of the rational motives have been investigated in the cross-sectional studies, which offer general support to at least some of them. However, the survey studies find very little to no support for the rational motives. This might be due to either the sensitivity of the surveys to the question contents, to the use of weak proxies in the cross-sectional studies, or a combination of these. In our view, future research in this field should aim for an approach that combines the use of survey data and cross-sectional analysis. We believe that such an approach may bridge the gap between theory and practice.

Keywords: convertible debt, security issuance, theory, surveys, empirical evidence, review

JEL Classification: G30, G32

Suggested Citation

Lončarski, Igor and ter Horst, Jenke R. and Veld, Chris, Why Do Companies Issue Convertible Bonds? A Review of Theory and Empirical Evidence (October 9, 2005). Available at SSRN: https://ssrn.com/abstract=837184 or http://dx.doi.org/10.2139/ssrn.837184

Igor Lončarski (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, SI-1000
Slovenia
+386 5892 628 (Phone)
+386 5892 698 (Fax)

Jenke R. Ter Horst

TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

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