Why firms issue convertible bonds: The matching of financial and real investment options

Why firms issue convertible bonds: The matching of financial and real investment options This paper contends that corporations use callable, convertible bonds to lower the issuance costs of sequential financing. Sequential financing increases issue costs but helps control overinvestment incentives that can arise if financing is provided prior to an investment option's maturity. A convertible bond's conversion option reduces issue costs while helping to control the overinvestment incentive. Evidence of important investment and financing activity around the time convertible bonds are called and converted supports the hypothesis. The evidence shows significant increases in capital expenditures and new long-term debt financing starting in the year of the call. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Why firms issue convertible bonds: The matching of financial and real investment options

Journal of Financial Economics, Volume 47 (1) – Jan 1, 1998

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Publisher
Elsevier
Copyright
Copyright © 1998 Elsevier Science S.A. All rights reserved
ISSN
0304-405x
D.O.I.
10.1016/S0304-405X(97)00038-X
Publisher site
See Article on Publisher Site

Abstract

This paper contends that corporations use callable, convertible bonds to lower the issuance costs of sequential financing. Sequential financing increases issue costs but helps control overinvestment incentives that can arise if financing is provided prior to an investment option's maturity. A convertible bond's conversion option reduces issue costs while helping to control the overinvestment incentive. Evidence of important investment and financing activity around the time convertible bonds are called and converted supports the hypothesis. The evidence shows significant increases in capital expenditures and new long-term debt financing starting in the year of the call.

Journal

Journal of Financial EconomicsElsevier

Published: Jan 1, 1998

References

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