Ebook Why European Firms issue Convertible Debt?
Why firms issue convertible debt has both intrigued and puzzled financial researchers. The convertible bonds are after all only a bundle of straight debt and call options on the issuer company’s stock. What special advantages do they provide that cannot be mimicked by a unit offering of straight bond debt and warrants? Yet the popularity of convertibles remains unabated and continues to challenge researchers to come up with reasonable explanations. A rich theoretical literature has also developed to explain rationales for convertible issuance but empirical evidence is mixed. The goal of this paper is to provide some insights into the link between theory and practice of convertible issuance through a survey of European managers.
Our survey complements and extends the literature in several aspects. First, most of the previous managerial surveys on convertible debt issuance have been undertaken in the U.S. which has a well-developed and mature convertible market. In contrast, the European convertible market gained momentum only in the mid-1990s but has grown rapidly since then. Further, European convertible bonds have several distinctive features not observed in the U.S. case. For example, in addition to issuing the standard convertible debt security, many European firms also issue exchangeable bonds where the options are written on securities of other firms. Also, many European convertibles are denominated in a currency other than that of the underlying equity. Further, convertible features, markets, and regulatory environments vary widely even across European countries providing us a rich data set to explore cross-country differences. The French market comprises about one third of the European market and is the fastest growing with a large base of private and institutional investors. In this study, we compare managerial perspectives of French versus other European firms to gain some insights into factors that may have spurred growth of the French convertible market.
Second, the direct empirical evidence on motivations for issuing convertibles consists largely of managerial surveys, beginning with the first such survey by Pilcher in 1955. In addition, several studies provide indirect evidence by studying characteristics of the issuers, offerings, and call features. Despite a preponderance of these studies, the empirical evidence is mixed. As Mayers (1998) observes that a problem with existing evidence on convertible bonds is that it is consistent with sequential-financing hypothesis as well as with after-issue risk shifting, risk estimation and asymmetric information theories. Another major problem is that managerial motivations are likely to change over time, making it difficult to interpret evidence from studies conducted over different time periods, each covering different aspects of convertible issuance. The main contribution of our study is to examine several aspects of convertible bond issuance in the same sample. We ask managers questions not only on the rationale for issuing convertibles but also on other aspects of convertible bonds such as the use of funds, influence of market conditions, and on the firm’s callable policy. This allows us to examine both direct and indirect implications of different theories in the same sample.
Finally, the interplay between theoretical development and survey evidence on rationales for issuing convertibles has been a continuous process. While evidence produced by earlier surveys appears to have motivated theoretical development in the 1980s and 1990s, theoretical developments in turn have led to more comprehensive surveys over time. Our survey continues this ongoing interaction by analyzing several new theories not examined in the previous surveys. Our approach is closer to that of Billingsley and Smith (BS, 1996) who combine analysis of market reaction to the announcements of convertibles issues with that of managerial survey data but differs from theirs in several dimensions. Our survey spans sixteen European countries and relates our findings relative to recent surveys on capital structure by Graham and Harvey (GH, 2001) and Bancel and Mittoo (BM, 2002).
We receive responses from eight European countries and our analysis shows some interesting findings. A majority of firms issue convertibles as “delayed equity” and as “debt sweetener”. Managers are also concerned about equity dilution and use “windows of opportunity” when issuing convertibles. However, there are substantial cross-sectional variations in reasons for issuing convertibles as well as in features of convertible bonds issued. Overall, we find mixed support for most theories on convertible issuance. The evidence suggests that convertibles appeal to different clienteles because of their versatility of design fitting in the financing needs of individual firms, and the investment needs of different institutional investors.
The rest of the paper is organized as follows. The next section reviews the literature on rationale for convertibles and discusses the survey design. Section 3 discusses the survey methodology and survey sample characteristics. Empirical analysis is presented in section 4 and summary and conclusions in the last section.
Download
PDF Ebook Why European Firms issue Convertible Debt?
Posted in :
