Motives and market reactions to convertible bonds and bonds with warrants issuance in an emerging market

Abstract

We examine why Korean firms issue hybrid securities, including convertible bonds and bonds with warrants. In particular, we investigate whether there exist any differences between companies issuing convertible bonds and those issuing bonds with warrants. Our findings show that younger firms with more growth opportunities, larger size, high leverage, low profitability, low credit rating, and low ownership concentrations are likely to issue more hybrid securities rather than straight debt or equity. Also, we find that firms with more growth opportunities, larger size, low profitability, and higher ownership concentrations prefer to issue convertible bonds rather than bonds with warrants. Although we find that the announcement effects of both convertible bonds and bonds with warrants are significantly positive, the cumulative abnormal returns are higher for convertible bonds than for bonds with warrants.