Convertible Securities and Heterogeneity of Investor Beliefs

Abstract

We conjecture that convertibles can better attract investors with different beliefs about a firm's future cash flows compared to straight bonds and stocks. Our empirical findings are consistent with this conjecture. We find that a firm is more likely to issue convertibles rather than seasoned stocks and straight bonds in the public markets when investors' beliefs are more heterogeneous. The positive effect of heterogeneous beliefs on the relative likelihood of convertibles is greater when investors are more optimistic. Overall, our findings provide a novel rationale based on investors' heterogeneous beliefs for the use of convertibles in corporate external financing decisions.

Economic policy uncertainty and cost of capital: the mediating effects of foreign equity portfolio flow

“…It is conceivable that economic policy uncertainty will increase the riskiness of the country and will make the recipient country less attractive to foreign equity portfolio investors. This is consistent with the argument that investors evaluate the riskiness of a firm's cash flow relative to other available investment opportunities when making investment decisions (see Du and Hu, 2015;Jiao and Yan, 2015). At the firm level, board characteristics impact the speed of capital structure adjustment (Ezeani et al 2021).…”

“…Even though Jiao and Yan (2015) document that firms use convertibles to attract investors with varying beliefs about a firm's future cash flows, we are interested in how foreign equity portfolio flows as a risk-sharing mechanism moderate the relation between economic policy uncertainty and cost of capital. We, therefore, examine whether foreign equity portfolio interacts with economic policy uncertainty to have a joint effect on the cost of capital.…”

Economic policy uncertainty and stock price crash risk

“…Previous studies have pointed out that trading volume contains information about investors’ heterogeneous beliefs (Harris and Raviv, ; Scheinkman and Xiong, ), and turnover has been used to measure the heterogeneity of investor beliefs (Jiao and Yan, ). In Model (8), TURN is the average monthly turnover of a quarter, and we use lagged TURN to measure the degree of investors’ disagreement.…”