Convertible Bond Issues Research Articles

Too Big to Fail: Toward an Optimal Regulation

This paper analyzes the optimal regulation for “Too Big to Fail” (TBTF) in a simple model. As government cannot credibly commit no bail-out during crises, banks have an incentive to become excessively large. In this case, no single policy can fully eliminate the inefficiencies from TBTF. The optimal regulation for the first-best allocation features a capital requirement and issuance of Contingent Convertible Bonds (CoCos) where the capital requirement addresses the moral hazard issue from government bailouts and CoCos improve the risk-sharing. Moreover, a combination of the capital requirement and size regulation can implement a second-best allocation where the government has to bail out the banking sector but the social cost of bail-out is internalized by the banks. In this case, the capital requirement forces banks to internalize the bailout cost while the size regulation directly discourages banks to become large.

Disappearing Call Delay and Dividend‐Protected Convertible Bonds

ABSTRACTFirms do not historically call their convertible bonds as soon as conversion can be forced. A number of explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely, dividend protection of convertible bond issues. Dividend protection means that the conversion value of the convertible bond is unaffected by dividend payments and thus dividend‐related rationales for call delay become moot. We document that call delay is near zero for dividend‐protected convertible bonds.

The Case of Beiesdorf, Inc. (2010-2014)

This article summarizes corporate strategy mistakes, and earnings management and asset quality management by Beiersdorf (an exchange-traded German company that also operated in the US and several countries during 2010-2017) which have implications for asset pricing, bankruptcy models and recovery-prediction models. The article summarizes a proposed sale-leaseback transaction with Beiersdorf (wherein two new types of sale-leaseback transactions were introduced) and briefly surveys the literature on sale-leaseback transactions. Sale-leasebacks are a well known operations strategy, but are increasingly treated as a distinct asset-class in fixed income markets (with real estate funds, hedge funds, HNWIs, insurance companies, pension funds, family offices and foundations as investors). The article also briefly reviews the third-party issuance of reverse convertible bonds and Discounts Certificates that were based on Beiersdorf during 2017.

A Summary of Literature: Convertible Bond Issue Announcement Effect

Convertible bond, whose holder has the right to convert it into shares in accordance with the agreed terms of the bond within a certain period, combines the common features of the bond and stock. Announcement effect of the securities, also known as wealth effect of the shareholder, is to investigate the influence of the major issuers on the company’s stock price. Because the nature of financial instruments is different, there are differences in issued announcement effect. Scholars’ study of the convertible bond from various countries also involves many aspects. The article gives the literature review on the issue of announcement effect and its influencing factors of target stocks. On the basis of summarizing the conclusions, this article also points out the studies’ shortcomings and deficiencies. We hope to be able to provide some inspiration for the development of the convertible bond market.

Convertible bond announcement effects: Why is Japan different?

U.S. and Japanese firms dominate global convertible bond issuance. Previous research documents more favorable convertible bond announcement effects in Japan than in the U.S. and other developed countries. Using a global sample of convertible bonds issued from 1982 to 2012, we find that the more favorable announcement effects of Japanese convertibles are driven by their stated uses of proceeds. Japanese convertibles more often include capital expenditure as an intended use, while U.S. firms tend to mention general purposes to motivate their offering. Our findings illustrate the value to firms of being more explicit when disclosing the intended use of proceeds of security offerings.

Convertible Bonds and Preference Shares: New Corporate Law Environment and Recent Tax Developments

The German legislature recently passed a bill that set out to amend the Stock Corporation Act and to make it more attractive to issue convertible bonds and, in particular, preference shares. This article investigates the current and new corporate law provisions regarding convertible bonds and preference shares in Germany and their tax treatment. While the new corporate rules enhance the versatility of the two instruments and the legal flexibility of the issuing company, the tax consequences regarding convertible bonds must be considered very carefully due to the recent German jurisprudence.

Shades of Grey: Corporate Financing with Convertible Bonds

Innovative financial instruments are used increasingly by firms to meet corporate capital requirements. We focus on one such instrument Convertible Bonds which combine the features of both debt and equity. We review literature on motives for corporate issuance of convertible bonds, post issue performance, extinguishment and financial reporting. We find that though issuance motives and post issue performance are well researched areas; the evidence is not conclusive. Adoption of IFRS and the impact thereof on key financial indicators of issuing firms will help firms design appropriate features in future. Studies covering entire lifecycle of the convertible bond and explaining different reasons for extinguishment of bonds are rather scant. We also find that there is greater scope of research on these topics in the context of emerging markets. We conclude with suggestions for other research topics that may be addressed in future.

Convertible bonds issued in the bear market period: evidence from Taiwan

We argue that the behaviour of enterprises might be modified or even changed completely after black swan events occur. We explore why high-tech firms preferred to issue convertible bonds in 2001–2003, the bear market period after the tech bubble in Taiwan. We show that firms issuing convertible bonds are those with low directors’ holding ratio and high debt ratio. Results also reveal that corporate governance was worse in the firms that issued convertible bonds, as revealed by the finding that the directors’ holding ratio of these issuing firms declined considerably. This finding also implies that corporate governance issues become more serious after black swan events.

The issuance of illegal and unfair convertible bonds and multiple derivative suits

The issuance of illegal and unfair convertible bonds and multiple derivative suits

Effect of the Issuance of Convertible Bonds on the Company’s Agency Costs

The separation of ownership rights and management rights on shares of a Joint-stock company leads to agency conflicts between shareholders and managers. With the separation of ownership and management of financing funds making the interests of shareholders contradict the interests of its creditors, the company’s agency costs come into being as a result. Through an empirical research on agency costs of 79 non-financial listed companies who issued convertible bonds during the year 2002-2013 in China, whether the issuance of the convertible bond is beneficial to reduce agency cost of listed companies is examined. The empirical results show that the issuance of convertible bonds contributes to the reduction of agency costs, which supports the assumption concluded from the theoretical researches conducted by foreign researchers that convertible bonds can reduce agency costs in some extent.

A Comparison of the Stock Market Reactions of Convertible Bond Offerings between Financial and Non-Financials Institutions: Do They Differ?

We focus on the stock price reaction to convertible bond offering made by financial institutions and find that the cumulative abnormal return over the three day interval around convertible bond issuance is 1.41 percentage higher than that for non-financial institutions. This result supports our hypothesis that since financials are heavily regulated, the market is less likely to assume that the issuance of convertible bond by financials signals information that are overvalued. Our results remain robust after controlling for a number of firm-, issue-, and market-specific characteristics as well as the level of short selling pressure induced by convertible bond arbitrageurs.

A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?

We focus on the stock price reaction to convertible bond offering made by financial institutions and find that the cumulative abnormal return over the three day interval around convertible bond issuance is 1.41 percentage higher than that for non-financial institutions. This result supports our hypothesis that since financials are heavily regulated, the market is less likely to assume that the issuance of convertible bond by financials signals information that are overvalued. Our results remain robust after controlling for a number of firm-, issue-, and market-specific characteristics as well as the level of short selling pressure induced by convertible bond arbitrageurs.

What we do and do not know about convertible bond financing

We review the literature on the issuance motives, shareholder wealth effects, and design of convertible bonds. Empirical studies on convertible debt issuance mainly focus on testing the predictions of four traditional theoretical models based on convertibles' potential to mitigate agency or adverse selection costs, and obtain mixed evidence. Recent studies on shareholder wealth effects of convertible bond issues highlight the need to control for arbitrage-related short selling and post-issuance risk changes. Studies on the determinants of convertible bond design uncover earnings management, as well as catering incentives to convertible arbitrage funds, as important determinants of innovations in convertible bond characteristics. Overall, our review indicates that recent empirical research on convertible debt provides valuable insights into issue motives and determinants of financial innovations, but also considers the broader question of how investor demand characteristics impact corporate finance decisions. We conclude with an overview of potential research questions to be addressed by future research on hybrid securities.

More than meets the eye: Convertible bond issuers' concurrent transactions

We document that, in recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting that these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.

Market Reaction to Announcements of Convertible Bonds Issue in the United Kingdom

This study investigates the wealth effects of announcements of the intention to issue convertible bonds in the UK market over a period from January 1990 until July 2010. The study period also allows for an investigation on the market reaction to announcements of convertible bonds during the financial crisis that started in August 2007. Using the standard event study methodology, a negative abnormal return of 1.75% (significant at the 5% level) on the two-day event window is reported, confirming the findings of previous UK studies (Abyhankar and Dunning, 1999, and Wolf et al., 1999) which are also in line with studies performed using data from other countries such as US, Canada, Australia, and others. There are no significant differences between the results of the sub-samples before and during the financial crisis, suggesting that the economic conditions do not influence the market response. The results of the event study and the multivariate analysis are consistent with the ‘market timing hypothesis’ implying that managers in the UK announce their intention to issue convertible bonds after a period of good stock price performance.

Does corporate governance influence convertible bond issuance?

We examine the influence of corporate governance quality on firms' choice between convertible debt, straight debt, and equity using a Western European sample of security offerings made between 2000 and 2010. We find that weaker firm-specific and country-specific corporate governance quality increases firms' likelihood of issuing convertible debt instead of straight debt and common equity. We also find that stockholder reactions to convertible debt announcements are more favorable for firms with weaker corporate governance. Our results suggest that corporate governance quality is a significant security choice determinant, with firms using convertible debt as a substitute for high quality governance mechanisms.

More than Meets the Eye: Convertible Bond Issuers' Concurrent Transactions

In recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.

The Empirical Research of the Relationship on Underlying Stock Volatility in China Convertible Bonds Market

The study tries to improve the pricing efficiency of pricing models for the convertible bond by calculating the volatility of the underlying stock more accurately. By deducing the relationship between the historical volatility before the convertible bond issue which can be calculated accurately and the historical volatility of the underlying stock after the convertible bond issue which is suitable for pricing models and can’t be calculated accurately in China, the after volatility can be calculated directly and accurately.

Do Convertible Bond Issuers Cater to Investor Demand?

We examine the impact of fluctuations in investor demand for convertible securities on convertible bond issue volumes, pricing, and design. We find evidence of a positive impact of investor demand proxies on convertible bond issue volumes. We also document significantly lower convertible bond underpricing in periods with higher investor demand. The results hold in a variety of specifications, and are robust to controlling for firm‐specific and macroeconomic financing cost proxies. However, we obtain only limited evidence that issuers adjust the design of their convertible bond offerings in response to investor demand.

Dividend-Protected Convertible Bonds and the Disappearance of Call Delay

Firms have not historically forced conversion as soon as possible. Explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. Constantinides and Grundy (1986) posit that call delay can be optimal when the dividends to be received upon conversion are, or are expected to be, sufficiently large that convertible holders have an incentive to voluntarily convert. Asquith and Mullins (1991) introduce a corporate tax wedge between bondholder losses and shareholder gains and show that call delay can be optimal when the dividends to be received upon conversion exceed the after-tax coupon. We investigate an important change in convertible security design, namely that many recent convertible bond issues are dividend-protected. Dividend-protected convertibles are priced as if no dividends were paid by the firm and dividend-related rationales for call delay become moot. The optimal call policy for a dividend-protected convertible is that of Ingersoll (1977a) and Brennan and Schwartz (1977), namely call as soon as conversion can be forced. We examine the call decisions until 1-1-2011 for 432 callable convertible bonds issued in the period 2000 through 2006. Dividend protection for convertible bonds has increased in popularity over time: there are no dividend-protected convertible bonds in 2000, while 100 percent of the convertible bonds in our sample issued in 2005 are dividend-protected. We document that dividend-protected convertibles are called as soon as conversion can be forced and thus vindicate the original prediction of Ingersoll and of Brennan and Schwartz.