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1 – 10 of over 2000This study proposes an alternative perspective on why firms issue convertible debt, to supplement the largely theoretical motives identified in the existing literature. It…
Abstract
Purpose
This study proposes an alternative perspective on why firms issue convertible debt, to supplement the largely theoretical motives identified in the existing literature. It hypothesises that the separate presentation of convertible debt into its equity and liability components has economic consequences and advantage that explain why firms issue convertible over non-convertible debt, consistent with the debt covenant hypothesis. The purpose of this paper is to address the proposed perspective and hypothesis.
Design/methodology/approach
Data on convertible debt, gearing (debt assets and debt equity), debt issuance and retirement, etc. were collected for a sample of 1,104 firms listed on Bursa Malaysia. Regression analyses were then used to assess the hypotheses on how gearing affects the use of convertible debt and the impacts of its use on changes in gearing over the financing cycle.
Findings
Firms with higher gearing, and possibly those close to violating debt covenants, are more likely to issue convertible than non-convertible debt. In addition, the use of convertible rather than non-convertible debt both reduces the increase in gearing when debts are issued and leads to a larger decrease in gearing during debt retirements via conversion.
Practical implications
These effects on gearing provide firms with additional financial flexibility and enhance firms' capacity to borrow more from other sources, a lower-debt advantage.
Originality/value
This study demonstrates the informational role of financial reporting in addressing the stewardship emphasis, as part of the decision usefulness objective of financial reporting in the Conceptual Framework for Financial Reporting.
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Helen Bishop, Michael Bradbury and Tony van Zijl
We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies…
Abstract
We assess the impact of NZ IAS 32 on the financial reporting of convertible financial instruments by retrospective application of the standard to a sample of New Zealand companies over the period 1988 ‐ 2003. NZ IAS 32 has a broader definition of liabilities than does the corresponding current standard (FRS‐31) and it does not permit convertibles to be reported under headings that are intermediate to debt and equity. The results of the study indicate that in comparison with the reported financial position and performance, the reporting of convertibles in accordance with NZ IAS 32 would result in higher amounts for liabilities and higher interest. Thus, analysts using financial statement information to assess risk of financial distress will need to revise the critical values of commonly used measures of risk and performance when companies report under NZ IAS
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Bruce C. Payne, Janet D. Payne and Nancy C. Rumore
Contrary to theory, financial managers constantly attempt to exploit timing to offer securities that are the least costly to existing shareholders. The purpose of this study is to…
Abstract
Contrary to theory, financial managers constantly attempt to exploit timing to offer securities that are the least costly to existing shareholders. The purpose of this study is to illustrate the difference between theory and practice and to offer some rationale for this difference.
Honglei Yan, Suigen Yang and shengmin zhao
The purpose of this paper is to study the pricing efficiency of convertible bonds and arbitrage opportunities between the convertible bonds and the underlying stocks thus improve…
Abstract
Purpose
The purpose of this paper is to study the pricing efficiency of convertible bonds and arbitrage opportunities between the convertible bonds and the underlying stocks thus improve market efficiency.
Design/methodology/approach
Using nonparametric fixed effect panel data model, the authors build pricing model of convertible bonds and obtain fitted value for them. Then the authors constructs simultaneous confidence band for the smooth function to identify mispricing and study the pricing efficiency and arbitrage opportunities of convertible bonds.
Findings
Result shows, convertible bonds’ prices largely depend on stock prices. Pricing efficiency does not improve during the past few years as there are quite a few trading opportunities. Arbitrage opportunities increase as the stock prices approach it maxima, and selling opportunities for convertible bonds surpass buying opportunities which indicates that investors use market neutral strategies to arbitrage. Pricing efficiencies varies a lot and it is affected by the features of the stocks and convertible bonds. Index stocks eligible for margin trading with high liquidity enjoy higher pricing efficiency.
Research limitations/implications
The study does not take into account trading cost and risk management measures.
Practical/implications
Arbitrage between the underlying and the convertible bonds is profitable and contributes to pricing efficiency therefore should be encouraged. The regulator should pay attention to the extreme mispricing of the underlying and convertible bonds which cannot be corrected by the market as there might be manipulation.
Originality/value
Since traditional pricing methods are based on the framework of non-arbitrage equilibrium with the assumption of balanced and perfect market, there are many restrictions in the pricing process and the practical utility is somewhat limited, and the impractical assumptions lead to model risk. This study uses nonparametric regression to study the pricing of convertible bonds thus circumvents the problem of model risk. Simultaneous confidence band for smooth function identifies mispricing and explicitly reflects the variation of pricing efficiency as well as signalizes trading opportunities. Application of nonparametric regression and simultaneous confidence band in derivative pricing is advantageous in accuracy and simplicity.
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Ruey‐Dang Chang, Yee‐Chy Tseng and Ching‐Ping Chang
The purpose of this paper is to examine whether companies engage in earnings management during the specific years when convertible bonds are issued and redeemed; also to determine…
Abstract
Purpose
The purpose of this paper is to examine whether companies engage in earnings management during the specific years when convertible bonds are issued and redeemed; also to determine if any differences exist in earnings management when convertible bonds are issued domestically or abroad.
Design/methodology/approach
Discretionary current accruals are adopted as proxies for earnings management and the regression models are used to control the related variables.
Findings
The empirical results indicate that companies conduct earnings management in the years when convertible bonds are issued, and that there is no significant difference between earnings management when convertible bonds are issued in Taiwan or abroad. However, data after 2001 indicate that companies issuing convertible bonds abroad perform less earnings management compared to those issuing convertible bonds domestically. The results show no significant difference in earnings management in the years when convertible bonds are redeemed; the reasons may be due to the relatively small sample size and that the majority of convertible bonds are still outstanding.
Originality/value
This paper advances findings from previous studies, that firms conducting seasoned equity offerings manage earnings upward to increase the offering proceeds. This paper highlights the linkage between convertible bonds and earnings management. Conducting an integrated analysis of the relationship between convertible bonds and earnings management, it aims to provide a better understanding of the process.
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This paper aims to examine whether high equity incentives motivate executives to avoid issuing convertible debt and/or to design convertible debt issues as anti-dilutive to…
Abstract
Purpose
This paper aims to examine whether high equity incentives motivate executives to avoid issuing convertible debt and/or to design convertible debt issues as anti-dilutive to earnings-per-share (EPS).
Design/methodology/approach
Tests are conducted using the Heckman two-step probit model to control for potential self-selection bias between firms that issue straight debt and those that issue convertible debt. Further, analyses are conducted separately and jointly for the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) to assess the differential impact of CEOs’ and CFOs’ equity incentives on convertible debt issuance and design decisions.
Findings
Firms are more likely to design convertible debt issues as anti-dilutive to EPS when CFOs have high levels of equity incentives, but only when the firm stock price is sensitive to diluted EPS. High CEOs’ equity incentives have limited impact of convertible debt issuance and design decisions.
Research limitations/implications
The main limitation of this study is the generalizability of the findings and implications of this study due to the smaller sample size of convertible debt issues.
Originality/value
Prior research has shown that bonus incentives influence CEOs with disincentive for EPS dilution and motivate them to make anti-dilutive financing decisions. Further, there is evidence that high equity incentives motivate CEOs to manage earnings to boost short-term prices. This study extends prior literature by showing that high equity incentives provide executives with disincentive for EPS dilution and motivate CFOs to design convertible debt issues as anti-dilutive to EPS possibly to avoid reduced stock prices. Further, this study shows that CFOs have greater influence over convertible debt design choices than CEOs do.
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Christoph Ettenhuber and Dirk Schiereck
The purpose of this paper is to show how convertible debt is used in the renewable energy industry. The authors argue that there is an investor rationing component to the design…
Abstract
Purpose
The purpose of this paper is to show how convertible debt is used in the renewable energy industry. The authors argue that there is an investor rationing component to the design and market impact of convertible debt securities.
Design/methodology/approach
The authors apply event study methodology, option pricing theory and risk shift analysis to examine capital market reactions following the issuance of convertible debt by exchange-listed companies of the renewable energy sector.
Findings
Contrary to prior cross-industry research findings, the authors show that convertible debt in the renewable energy industry tends to have a debt-like structure, and its issue is associated with strongly negative announcement returns. The authors further show that convertible issuers face high business risk and adverse selection costs.
Practical implications
The results have important implications for both renewable energy industry companies and investors. For example, one problem is that the risk-mitigating features of convertible debt may not materialize, if issuers fail to credibly signal firm quality to the markets. Furthermore, excessive growth assumptions and mismatches between project risk/return and financing costs may render it more difficult to create credible signals.
Originality/value
The paper contributes to three primary strands of literature. One is the research on finance and growth. Here, this paper provides new insights into risk-mitigating securities that should more effectively mirror the risk and return distributions of emerging industry issuers. Additionally, it extends the research on the motives for convertible debt offerings and provides insight on stock returns around such announcements.
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U.S. venture capital financings of U.S. entrepreneurial firms with up to 213 observations are consistent with the proposition that convertible preferred equity is the optimal form…
Abstract
U.S. venture capital financings of U.S. entrepreneurial firms with up to 213 observations are consistent with the proposition that convertible preferred equity is the optimal form of venture capital finance. This paper introduces new evidence from 208 U.S. venture capital financings of Canadian entrepreneurial firms. In contrast to U.S. venture capital investments in U.S. entrepreneurial firms, U.S. venture capitalists finance Canadian entrepreneurial firms with a variety of forms of finance. The differences between domestic and international U.S. venture capitalist financing structures are not attributable to differences in the definition of the term ‘venture capital’. The data point to the importance of institutional determinants of venture capitalist capital structures within the U.S. and abroad. Among other things, the data indicate that U.S. venture capitalists often do not choose convertible preferred shares in the absence of tax considerations in favor of that financing vehicle.
Su Jeong Lee, Young Jun Kim, Eugenia Y. Lee and Ga-young Choi
Convertible instruments are financial instruments embedded with conversion rights such as convertible bonds or convertible preferred stocks. Under the Korean International…
Abstract
Convertible instruments are financial instruments embedded with conversion rights such as convertible bonds or convertible preferred stocks. Under the Korean International Financial Reporting Standards (K-IFRS), the embedded conversion rights with certain conditions (i.e., a refixing clause) are recognized as derivative liabilities and are recognized at fair value in issuer’s financial statements. Since the value of convertible rights varies with the underlying stock value, an increase in the issuers’ stock price causes the issuers of convertible instruments to announce large derivative valuation losses. Using disclosures under the title of ‘Loss from Derivatives Trading’ from the KOREA EXCHANGE (KRX) during January 2016 through December 2019, this study examines market reactions to the disclosure of valuation losses on conversion rights embedded in convertible instruments. We find the following results. First, abnormal stock returns on the loss announcement date are significantly negative. Second, abnormal trading volumes peak on the loss announcement date. Third, abnormal stock returns persist in the long-term. Collectively, our findings suggest that investors perceive the loss disclosures as negative news, but fail to impound the information into issuer’s stock prices effectively. This study emphasizes the importance of education on convertible instruments and improvement in the disclosure requirements on valuation losses of conversion rights embedded in convertible instruments by providing evidence that investors face difficulty in understanding the related disclosures.
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Michael S. Long, Ileen B. Malitz and Stephen E. Sefcik
We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and Miller and…
Abstract
We provide evidence of stock market performance prior to announcements of the assuance or retirement of securities which is consistent with Myers and Majluf [1984] and Miller and Rock [1985]. Stocks of firms issuing seasoned common equity are significantly over‐valued in the market prior to the issue, but in the year following, decline to their original level. Stocks of firms issuing convertible debt also are over‐valued, but to a lesser degree than that of firms issuing seasoned equity. Stock of firms issuing straight debt appears to be neither over‐valued nor undervalued. The after‐market firm performance, measured by earnings, cash flows or dividends, is consistent with Miller and Rock. We document a decline in after‐market performance for firms issuing convertible or straight debt and an improvement for those repurchasng shares. However, contrary to predictions, we find that firms issuing seasoned equity do not have lower earnings or cash flows in the following year, and increase their rate of dividend payment as well. We document evidence indicating that firms issue equity to maintain or increase dividends. The market anticipates the dividend increase and shows no response to announcements of dividend changes following an equity issue. However, we are unable to explain why the market reacts in such a negative manner to equity issues, when the after‐market performance of the firm is as expected.