What Drives the Issuance of Putable Convertibles: Risk-Shifting, Asymmetric Information, or Taxes?
Financial Management, March 2010
66 Pages Posted: 26 Mar 2008 Last revised: 15 Apr 2010
Date Written: February 1, 2010
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: Suggested Citation