Born of necessity: The introduction of convertible bonds in The Netherlands

Abstract

This paper investigates the adoption of convertible bonds in the Netherlands in the nineteenth century. These instruments were introduced around the start of the nineteenth century in British canal companies and later adopted by U.S. canal builders. Their value in large infrastructural projects was firmly established when British and American railroads issued bonds which were convertible into shares. In the Netherlands, convertible bonds were first used in the second half of the nineteenth century. To understand the motives for issuing convertibles, we study the first Dutch firms that issued convertible bonds. We document that firms that were rationed by financial markets in equity and bond issues were still able to place convertible bonds successfully. We demonstrate that the riskiness of the firm’s business was a key driver of convertible bond issuance, while personal networks enabled the financial innovation to be adopted in the Netherlands.