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Why do companies issue convertible bond loans? An empirical analysis for the Canadian market
Author(s) -
Loncarski Igor,
ter Horst Jenke,
Veld Chris
Publication year - 2008
Publication title -
canadian journal of administrative sciences / revue canadienne des sciences de l'administration
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 48
eISSN - 1936-4490
pISSN - 0825-0383
DOI - 10.1002/cjas.64
Subject(s) - convertible bond , issuer , equity (law) , debt , business , agency cost , monetary economics , convertible arbitrage , financial system , convertible , economics , financial economics , finance , shareholder , corporate governance , structural engineering , political science , law , capital asset pricing model , arbitrage pricing theory , risk arbitrage , engineering
To identify issuer motives, we study the determinants of announcement effects of convertible debt issues in the Canadian market. Classified into equity‐ and debt‐like, wealth effects are significantly more negative for equity‐like convertible bond issuers. Equity‐like convertibles are significantly negatively affected by agency costs of equity. However, agency costs of debt have no significant effect on debt‐like convertibles. Consistent with Stein (1992), this suggests convertibles in particular represent a substitute for equity. Moreover, convertible debt offers announced by income trusts experience significantly less negative wealth effects than offers by nontrusts—a finding explained by a more debt‐like convertible design, very low agency costs of equity in case of income trusts, or both. Copyright © 2008 ASAC. Published by John Wiley & Sons, Ltd.