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Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity?
Author(s) -
Dutordoir Marie,
Van de Gucht Linda
Publication year - 2009
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/j.1468-036x.2007.00433.x
Subject(s) - issuer , convertible bond , convertible , equity (law) , debt , business , internal debt , debt levels and flows , financial system , monetary economics , economics , finance , political science , structural engineering , law , engineering
Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt‐ and equity‐related financing costs. Therefore, it is puzzling why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model that incorporates convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is reflected in the debt‐like design of most European convertible issues.