Why Do Companies Issue Convertible Bonds? A Review of Theory and Empirical Evidence
34 Pages Posted: 21 Sep 2006
Date Written: October 9, 2005
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: Suggested Citation