Why Do Firms Issue Convertible Debt?

Randall S. Billingsley · David M. Smith

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Corporate Finance and Governance Financial Analysis and Corporate Governance Credit Risk and Financial Regulations

Abstract

Randall S. Billingsley is Associate Professor of Finance in the Pamplin College of Business at Virginia Polytechnic Institute and State University, Blacksburg, Virginia. David M Smith is Associate Professor of Finance at the University at Albany, SUNY, Albany, New York. This paper updates several widely cited studies on the motivation for convertible debt issuance. Our recent survey finds that firms use convertibles primarily as an alternative to straight debt, employing a conversion feature to buy down the coupon rate and thus preserve cash flow. The results confirm a decreasing reliance on convertibles as delayed equity financing. Cumulative abnormal returns are related to managers' estimates of the degree of equity underpricing, and to the degree of potential equity dilution associated with the convertible issue. Early evidence is also provided on managers' views of the recent regulatory innovation, Rule 144A.

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1984Corporate financing and investment decisions when firms have information that investors do not have 1985Dividend Policy under Asymmetric Information 1986Equity issues and offering dilution 1992Convertible bonds as backdoor equity financing 1984Convertible debt issuance, capital structure change and financing-related information 1991Expectations of security type and the information content of debt and equity offers 1966AN ANALYSIS OF CONVERTIBLE DEBENTURES: THEORY AND SOME EMPIRICAL EVIDENCE*

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