Why Do Companies Issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market

CentER Discussion Paper No. 2006-65

41 Pages Posted: 31 Mar 2006 Last revised: 28 Apr 2008

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: April 24, 2008

Abstract

We study the announcement effects and their determinants of convertible debt issues in the Canadian market in order to identify issuer motives. The average wealth effect for the three-day event window around the announcement of convertible bonds between 1991 and 2004 is a significantly negative -2.7%. When the issues are classified into equity- and debt-like, we find that the wealth effects are significantly more negative for the equity-like convertible bond issuers. Equity-like convertibles are significantly negatively affected by agency costs of equity. However, agency costs of debt do not have a significant effect on equity-like convertibles and agency costs of equity do not have a significant effect on debt-like convertibles. These findings suggest that convertibles are used to mitigate different aspects of informational asymmetries. These findings are in line with motives proposed by Stein (1992). Moreover, we find that convertible debt offers announced by income trusts, which have become a special feature of the Canadian market, experience significantly less negative wealth effects than similar offers announced by other issuers. This result can be explained by a more debt-like convertible design and/or very low agency costs of equity in case of income trusts.

Keywords: event study, convertible bonds, wealth effects, agency costs, income trusts

JEL Classification: G14, G30, G32

Suggested Citation

Lončarski, Igor and ter Horst, Jenke R. and Veld, Chris, Why Do Companies Issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market (April 24, 2008). CentER Discussion Paper No. 2006-65. Available at SSRN: https://ssrn.com/abstract=894244 or http://dx.doi.org/10.2139/ssrn.894244

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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