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CAPITAL STRUCTURE MANAGEMENT AS A MOTIVATION FOR CALLING CONVERTIBLE DEBT
Author(s) -
Emery Douglas R.,
IskandarDatta Mai E.,
Rhim JongChul
Publication year - 1994
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1994.tb00176.x
Subject(s) - capital structure , convertible bond , leverage (statistics) , debt , convertible , equity (law) , book value , debt to equity ratio , financial economics , debt ratio , business , monetary economics , retained earnings , balance sheet , pecking order theory , equity value , economics , earnings management , empirical evidence , earnings , finance , internal debt , debt levels and flows , political science , nonprobability sampling , philosophy , epistemology , population , demography , law , structural engineering , sociology , computer science , engineering , machine learning
Using a matched‐pairs methodology, we present empirical evidence of systematic changes within a corporation that are associated with calls of convertible debt. We find that calling firms experience significantly greater growth than noncalling firms in the same industry, as measured by retained earnings and long‐term debt. Also, the converted debt provides a significant source of new book equity, and calling firms issue significantly less other new equity. The pattern of growth in balance sheet accounts is consistent with the pecking order hypothesis and supports the notion that some firms call convertible debt to reduce their total cost of obtaining additional external financing. The evidence also shows that, on average, calling firms experience a significant decline in their leverage ratio based on book value but no significant change in their leverage ratio based on market value of equity. This is consistent with the call's being used as part of the firm's management of its capital structure.