The role of convertible bonds in alleviating contracting costs

Risk dynamics surrounding the issuance of convertible bonds

“…For the set of firms issuing convertible bonds, we also document the conversion probability at issuance. On average, it is less than 40%, but this is higher than the below 30% probability observed in prior empirical studies for the U.S. (Krishnaswami and Yaman, 2008). 11 With regard to the S&P ratings of the issuing firms, we find that issuers of both convertible debt (BB −) and seasoned equity (B +) have very similar and rather low credit ratings prior to issuance.…”

Executive compensation and capital structure: The effects of convertible debt and straight debt on CEO pay

“…Green (1984) shows that convertible debt introduces a concave region in the payoff to levered equity that ameliorates risk-shifting incentives and reduces the agency costs of debt finance. Supporting this rationale for convertible debt issuance, several papers document that firms with greater propensity to shift risk onto bondholders are more likely to issue convertibles (e.g., Mikkelson, 1981;Lewis et al, 1998Lewis et al, , 1999Krishnaswami and Yaman, …”

“…As a result, firms with convertible debt in their capital structures differ from firms with straight debt in that they have used security design to mitigate the agency costs of debt, and therefore may use higher pay-performance sensitivities to minimize agency costs of equity. Thus, the ARTICLE IN PRESS 1 See, e.g., Mikkelson (1981), Lewis et al (1998Lewis et al ( , 1999, Krishnaswami and Yaman (2004), and Gomez and Phillips (2005). second and distinct implication of the agency cost of debt hypothesis is that firms with convertible debt will set higher pay-performance sensitivities.…”

Do Convertible Bond Issuers Cater to Investor Demand?

“…Shocks in the capital available to these funds may lead to a significant effect of investor demand on convertible bond issuance. Regarding corporate opportunism, empirical studies commonly find that convertible bond issuers are small, high risk, unrated companies with high costs of raising standard straight debt or equity financing (Lewis et al, 1999(Lewis et al, , 2003Krishnaswami and Yaman, 2008). Therefore, investor demand may be more binding for convertible bond issuers than for companies with an unrestricted choice among external financing types.…”

“…Our article contributes to three areas of the existing research. First, we complement studies regarding the determinants of security choices (Marsh, 1982;Lewis et al, 1999Lewis et al, , 2003Erel et al, 2012), security underpricing (Altinkilic and Hansen, 2003;Chan and Chen, 2007;Intintoli and Kahle, 2010), and security design (Lewis, Rogalski, and Seward, 1998;Krishnaswami and Yaman, 2008). These studies focus on firm-specific and macroeconomic measures of firms' costs of raising external financing.…”