Investment and financing activity following calls of convertible bonds

Abstract

The staged financing hypothesis of Mayers [Mayers, D., 1998. Why firms issue convertible bonds: The matching of financial and real investment options. Journal of Financial Economics 47, 83–102] predicts that investment and financing activity will increase following in the money convertible bond calls. The prediction for out of the money convertible calls is different: no increase is expected. We study the rate of both corporate investment and external financing around forced conversions using benchmarks that are analogous to those recommended by Barber and Lyon [Barber, B., Lyon, J., 1996. Detecting abnormal operating performance: The empirical power and specification of test statistics. Journal of Financial Economics 41, 359–400]. We also examine the cross-section of changes in investment and financing activity. Conversion-forcing firms exhibit an increase in both capital expenditures and debt financing around the year of the convertible bond call; however, the same result holds for the sample firms that conducted out-of-the-money convertible calls. Further, there is no relation between changes in investment activity and changes in debt issuance at the firm level. The evidence is inconsistent with the notion that forced conversions serve as a catalyst for staged financing and investment.