Why Do Firms Issue Convertible Bonds? Evidence from the Field

Abstract

We use in-depth interviews with top corporate executives and a question-conditional analysis of a broader survey sample to examine why companies issue convertible bonds. Our findings suggest that firms use convertibles as an alternative for straight debt, which is deemed too costly or covenant-heavy. Equity tends to be ruled out in a previous step of the security choice process because of perceived stock undervaluation. We obtain considerable evidence for the risk uncertainty theory on convertible issuance, while risk shifting, sequential financing, and backdoor equity theories receive little or no support. Our interviews also highlight the substantial impact of investor demand fluctuations and financial intermediaries on corporate security choices and design.