What Drives the Issuance of Putable Convertibles: Risk-Shifting, Asymmetric Information, or Taxes?

Financial Management, March 2010

EFA 2006 Zurich Meetings

66 Pages Posted: 26 Mar 2008 Last revised: 15 Apr 2010

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Karen Simonyan

Suffolk University - Department of Finance

Date Written: February 1, 2010

Abstract

Putable convertibles, which are convertible bonds that allow bondholders to “put” or sell the bonds to the issuer at pre-specified prices on pre-specified dates, have become an important means of raising external capital in the current decade. This paper presents the first empirical analysis of firms’ rationale for issuing putable convertibles in the literature. Using a sample of firms choosing to issue either putable or ordinary convertibles, we distinguish between three possible rationales for the issuance of putable convertibles: the risk-shifting hypothesis, the asymmetric information hypothesis, and the tax savings hypothesis. The results of our empirical analysis can be summarized as follows. First, firms that issue putable convertibles are larger, less risky firms, having larger cash flows, smaller growth opportunities and lower bankruptcy probabilities compared to those issuing ordinary convertibles. Second, putable convertible issuers have lower pre-issue market valuations, more favorable announcement effects, and better post-issue operating performance compared to ordinary convertible issuers. Third, putable convertible issuers have better post-issue long-run stock return performance compared to ordinary convertible issuers. Fourth, the sub-sample of firms issuing putable convertibles with larger conversion premia have lower pre-issue market valuations, more favorable announcement effects, and better post-issue operating performance compared to the sub-sample of firms issuing putable convertibles with smaller conversion premia. Fifth, putable convertible issuers have greater tax obligations and better credit ratings on average than ordinary convertible issuers. Overall, the results of our univariate as well as multivariate analyses provide support for the asymmetric information and tax savings hypotheses but little support for the risk-shifting hypothesis.

Keywords: Putable Convertibles, Convertible Bonds, Issuing Convertible Debt, Performance

JEL Classification: G30, G39

Suggested Citation

Chemmanur, Thomas J. and Simonyan, Karen, What Drives the Issuance of Putable Convertibles: Risk-Shifting, Asymmetric Information, or Taxes? (February 1, 2010). Financial Management, March 2010; EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=889221

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Karen Simonyan

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

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