Risk dynamics surrounding the issuance of convertible bonds

Zeidler, F.; Mietzner, Mark; Schiereck, Dirk

doi:10.1016/j.jcorpfin.2011.12.001

Cited by 24 publications

(14 citation statements)

References 52 publications

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“…They conclude that not all issuers use convertible debt financing to reduce agency conflicts. Zeidler et al (2012) confirm the decrease in systematic equity risk for the years 1980-2002 and document that this change is more pronounced for small firms.…”

Section: Convertible Debt and Risk-shiftingsupporting

confidence: 73%

Convertible debt and shareholder incentives

Dorion¹,

François²,

Grass³

et al. 2014

Journal of Corporate Finance

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Abstract:Given equity's convex payoff function, shareholders can transfer wealth from bondholders by increasing firm risk. We test the existing hypothesis that convertible debt reduces this classical agency problem of risk-shifting. First, we derive a measure of shareholders' risk incentives induced by convertible debt using a contingent claims framework. We then document that when risk-shifting incentives are high, the propensity to issue convertible (rather than straight) debt increases and the negative stock market reaction following convertible debt issue announcements is amplified. We further highlight that convertible debt is the only type of security that affects business risk durably downwards. Our conclusions support the agency theoretic rationale for convertible debt financing especially for financially distressed firms.

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Section: Convertible Debt and Risk-shiftingsupporting

confidence: 73%

Convertible debt and shareholder incentives

Dorion¹,

François²,

Grass³

et al. 2014

Journal of Corporate Finance

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“…We find that PIPE firms have significantly higher skewness than control firms, indicating that the PIPE has increased the optionality of the issuing firms. This result is consistent with Zeidler, Mietzner, and Schiereck (2012) who offer a real option explanation of the apparent underperformance of convertible debt issuances. They argue that issuing convertible debt is the exercise of a growth option, and since growth options are riskier than the underlying assets, their exercise reduces risk and hence commensurately reduces the required return.…”

Section: Introductionsupporting

confidence: 91%

“…The overwhelming evidence shows a negative post-issuance valuation effect (Abhyankar and Dunning 1999;Agarwal et al 2011;Bechmann 2004;Carpentier, L'Her, and Suret 2013;Chou et al 2009;Duca et al 2012;Lewis, Rogalski, and Seward 2001;Lin et al 2013;Rahim, Goodacre, and Veld 2014;Zeidler, Mietzner, and Schiereck 2012). Rahim, Goodacre, and Veld (2014) conducted a meta study of 35 studies across 84 samples and 6,310 announcements and found a negative wealth effect of 1.14%; US issuances of convertibles were associated with more negative wealth effects (an additional 1.11%).…”

Section: Literature Reviewmentioning

confidence: 99%

Death spiral PIPEs: a reconsideration of the evidence

Benson

Linnenluecke

Morrison

et al. 2019

Accounting & Finance

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“…The use of a debt component in a hybrid instrument allows financing to be managed in difficult times. The conversion price being higher than the market price helps the issuer avoid the purchase of stock by undesired investors and may protect against a takeover (Zeidlera et al, 2012). The issuance of straight debt in times of crisis may stimulate the risk of bankruptcy.…”

Section: Theoretical Premises Behind the Use Of The Call/put Optmentioning

confidence: 99%

Use of hybrid debt early redemption during the financial crisis

Marszałek¹

2016

AESTIMATIO

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The goal of the paper is to analyse the changes in financing conditions of enterprises using convertible bonds, especially those enhanced by the early redemption call/put option. The study was conducted over two periods: before and after the global financial crisis outbreak. The paper has been hypothesized, confirming the use of the call/put option to raise capital on better terms compared to traditional hybrid debt. The study involved the major characteristics of convertible bonds issued by US non-financial corporations before and after the crisis of 2008. To evaluate the differences between the characteristics of bonds, statistical analysis based on significant differences test, t-test for independent samples, the Mann-Whitney test and two-factor analysis of variance were employed. The analysis shows that the worse the economic conditions, the shorter the debt maturity, conversion time and conversion premiums. An increased conversion ratio was also observed. These changes, however, are lower for bonds enhanced by the call/put option. This means that the financial crisis has worsened the conditions of hybrid financing. The call/put option eased this change by reducing the financial distress between the company and investors.

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Risk dynamics surrounding the issuance of convertible bonds

Cited by 24 publications

References 52 publications

Convertible debt and shareholder incentives

Convertible debt and shareholder incentives

Death spiral PIPEs: a reconsideration of the evidence

Use of hybrid debt early redemption during the financial crisis

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