Does Corporate Governance Influence Convertible Bond Issuance?

Dutordoir, Marie; Strong, Norman; Ziegan, Marius C.

doi:10.2139/ssrn.2063557

Cited by 12 publications

(15 citation statements)

References 91 publications

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“…This result seems to be consistent with empirical findings by Isagawa () and Dutordoir et al. (), showing that convertibles alleviate firms' financial distress and are perceived as more valuable for firms with weaker corporate governance and higher distress costs. Furthermore, the gap between V cd and V sd widens as ambiguity aversion increases (see Figure ).…”

Section: The Modelsupporting

confidence: 92%

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Agliardi

Spanjers

2015

Int Rev Finance

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Abstract. This paper integrates ambiguity into a contingent claim model for convertible debt. We study how convertible debt valuation is affected by the ambiguity biases of equity holders and debt holders and provide sensitivity analysis of the bond value to changes in attitude toward ambiguity, firm and bond parameters. Our results, which are summarized into six main predictions, are consistent with recent empirical evidence and offer a possible interpretation of some corporate finance puzzles.

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Section: The Modelsupporting

confidence: 92%

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Agliardi

Spanjers

2015

Int Rev Finance

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“…Similar to the findings in the US market, Dutordoir and Van de Gucht () and Dutordoir et al. () find quantitative evidence in favour of the RSH among Western European companies using stock return volatility to measure the cost of risk‐shifting. As qualitative evidence is garnered from analysing the surveys of CFOs, prior researchers have found that 72% of Western European CFOs consider convertibles to be less expensive than straight debts, which is consistent with the implications of the RSH.…”

Section: Discussionsupporting

confidence: 64%

“…With respect to control variables, the significantly negative coefficient of Net Income/Assets implies that profitable companies prefer straight debts because they experience no difficulties in paying interest (Dutordoir, Strong, & Ziegan, ; Lewis et al., ). The coefficients of Long‐term Debt/Assets , Volatility , and Slack are significantly positive.…”

Section: Resultsmentioning

confidence: 99%

CEO inside debt and convertible bonds

Rhee

Shen

2017

Business Fin & Account

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The question whether convertible bonds are issued to combat the risk-shifting problem is a subject of debate in the literature, primarily because of the unavailability of clear measures regarding managerial risk-shifting incentives. Taking advantage of recently developed inside debt-holding measures for CEOs, we find strong evidence in support of the risk-shifting hypothesis. When a CEO holds a large amount of inside debt, three distinct patterns emerge: (i) the firm exhibits a lower ratio of outstanding convertibles to total debt;(ii) the firm is less likely to issue convertibles than straight debt; and (iii) the firm devises contract terms to decrease the chance of conversion when it issues convertibles. K E Y W O R D Sconvertible bond, inside debt, risk shifting INTRODUCTIONFinancial economists have been challenged with the task of explaining the issuance of convertible bonds because these hybrid securities do not fit perfectly into the classical capital theories on the equity-debt choice. The risk-shifting hypothesis (RSH), first introduced by Jensen and Meckling (1976), is often proposed as a reason that convertibles are issued. The RSH posits that controlling shareholders pursue a level of asset risk that is excessive from debtholders' point of view because the value of an equity claim is analogous to a call option written on asset value. Risk-shifting firms thus experience relatively strict financing constraints in the debt market.The issuance of convertible bonds rather than straight bonds is a financing strategy that firms can use to offer assurance to their debt investors. Jensen and Meckling (1976) argue that by issuing a bond-warrant combined security, shareholders effectively share part of the proceeds of the increased asset risk with the firm's debtholders, in turn curbing shareholders' incentive to pursue risk. Green (1984) presents a theoretical model and formalizes that intuition.However, the RSH has received limited empirical support in the literature despite its theoretical validity. The main challenge confronted by any empirical test of the RSH is the difficulty of finding clear empirical proxies for managerial risk-shifting incentives. Earlier studies use firm characteristics as their empirical proxies for the degree of risk-shifting problems. Seward (1999, 2003) propose that firms with fewer profitable investment opportunities (measured by the market-to-book ratio) and greater idiosyncratic risk have a higher degree of risk-shifting concern. In a similar vein, King and Mauer (2014) relate a firm's set of investment opportunities to the extent of its agency concerns. Although these variables are arguably associated with agency costs, they do not exclusively capture managerial risk-shifting incentives. For instance, substantial investment opportunities and high risk may occur together with high 232

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“…Overall, our results based on the sample of public offerings support our heterogeneous belief explanation. The literature on the use of convertible securities also suggests an asymmetric information explanation: convertibles can help reduce adverse‐selection costs arising from information asymmetry (see, e.g., Brennan and Kraus ; Constantinides and Grundy ; Stein ; Chakraborty and Yilmaz ; Lewis, Rogalski, and Seward ; Finnerty, Jiao, and Yan ; Chemmanur et al forthcoming; Dutordoir, Strong, and Ziegan ).…”

Section: Introductionmentioning

confidence: 99%

Convertible Securities and Heterogeneity of Investor Beliefs

Jiao

Yan

2015

J of Financial Research

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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.

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Does Corporate Governance Influence Convertible Bond Issuance?

Cited by 12 publications

References 91 publications

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

CEO inside debt and convertible bonds

Convertible Securities and Heterogeneity of Investor Beliefs

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