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1 – 10 of over 1000Christoph 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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This 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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David P. Stowell and Peter Rossmann
Freeport-McMoRan's acquisition of Phelps Dodge created the world's largest publicly traded copper company. JPMorgan and Merrill Lynch advised the acquirer and arranged $17.5…
Abstract
Freeport-McMoRan's acquisition of Phelps Dodge created the world's largest publicly traded copper company. JPMorgan and Merrill Lynch advised the acquirer and arranged $17.5 billion in debt financing and $1.5 billion in credit facilities. In addition, these two firms underwrote $5 billion in equity capital through simultaneous offerings of Freeport-McMoRan common shares and mandatory convertible preferred shares. These financings created an optimal capital structure for the company that resulted in stronger credit ratings. The activities of the equity capital markets and sales groups at the underwriting firms are explored and the structure and benefits of mandatory convertible preferred shares is explained.
To understand the role of investment banks in advising a large corporation regarding an acquisition and related financings in the capital markets. As part of this, the activities of an investment banking firm's equity capital markets group and their underwriting risks are analyzed. Finally, the structure of a mandatory convertible security is reviewed in terms of benefits to both issuers and investors.
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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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The purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) Regulatory Notices and Disciplinary Actions issued in January…
Abstract
Purpose
The purpose of this summary is to provide excerpts of selected Financial Industry Regulatory Authority (FINRA) Regulatory Notices and Disciplinary Actions issued in January, February, and March 2010.
Design/methodology/approach
The paper provides excerpts from FINRA Regulatory Notice 10‐05, Deferred Variable Annuities; Regulatory Notice Regulatory Notice 10‐09, Reverse Convertibles, and Regulatory Notice 10‐14, Trade Reporting and Compliance Engine (TRACE).
Findings
(10‐05) FINRA Rule 2330 (formerly NASD Rule 2821) establishes sales practice standards regarding recommended purchases and exchanges of deferred variable annuities. No member shall recommend to any customer the purchase or exchange of a deferred variable annuity unless such member or person associated with a member has a reasonable basis to believe that the transaction is suitable in accordance with NASD Rule 2310 and, in particular, that there is a reasonable basis to believe that the customer has been informed, in general terms, of various features of deferred variable annuities. NASD Rule 2310 requires that, before recommending the purchase or sale of a security, firms must have a reasonable basis for determining that the product is both suitable for at least some investors, and suitable for each specific customer to whom it is recommended. (10‐09) Reverse exchangeable securities, commonly called “reverse convertibles,” are popular structured products with retail investors, due in large part to the high yields they offer. However, reverse convertibles are complex investments that often involve terms, features and risks that can be difficult for retail investors and registered representatives to evaluate. (10‐14) FINRA believes that it is important to provide access to historical transaction‐level data through the Trade Reporting and Compliance Engine (TRACE), particularly for research purposes.
Originality/value
These are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends. The FINRA staff is aware of this summary but has neither reviewed nor edited it. For further detail as well as other useful information, the reader should visit www.finra.org
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A. Kaveh, H. Rahami and Iman Shojaei
The purpose of this paper is to present an efficient method for dynamic analysis of structures utilizing a modal analysis with the main purpose of decreasing the computational…
Abstract
Purpose
The purpose of this paper is to present an efficient method for dynamic analysis of structures utilizing a modal analysis with the main purpose of decreasing the computational complexity of the problem. In traditional methods, the solution of initial-value problems (IVPs) using numerical methods like finite difference method leads to step by step and time-consuming recursive solutions.
Design/methodology/approach
The present method is based on converting the IVP into boundary-value problems (BVPs) and utilizing the features of the latter problems in efficient solution of the former ones. Finite difference formulation of BVPs leads to matrices with repetitive tri-diagonal and block tri-diagonal patterns wherein the eigensolution and matrix inversion are obtained using graph products rules. To get advantage of these efficient solutions for IVPs like the dynamic analysis of single DOF systems, IVPs are converted to boundary-value ones using mathematical manipulations. The obtained formulation is then generalized to the multi DOF systems by utilizing modal analysis.
Findings
Applying the method to the modal analysis leads to a simple and efficient formulation. The laborious matrix inversion and eigensolution operations, of computational complexities of O(n2.373) and O(n3), respectively, are converted to a closed-form formulation with summation operations.
Research limitations/implications
No limitation.
Practical implications
Swift analysis has become possible.
Originality/value
Suitability of solving IVPs and modal analysis using conversion and graph product rules is presented and applied to efficient seismic optimal analysis and preliminary design.
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In this study we analyze the determinants of the type and structure of debt included in dual offerings of debt and equity. Our sample consists of 54 dual offerings of convertible…
Abstract
In this study we analyze the determinants of the type and structure of debt included in dual offerings of debt and equity. Our sample consists of 54 dual offerings of convertible bond and common stock (CBCS) and 258 dual offerings of straight bond and common stock (SBCS). We find that firms with high asset substitution problems are more likely to issue CBCS offerings instead of SBCS offerings. These firms are also more likely to include convertible bonds with a high probability of conversion in the issue. The probability of CBCS offerings is higher for firms with low information asymmetry and during high interest rate periods. We also find that the announcement returns of CBCS offerings are lower than the returns of SBCS offerings.
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Despite the existence of accounting standards, there still remains a degree of flexibility in their interpretation and gaps between rules. It is alleged that management practises…
Abstract
Despite the existence of accounting standards, there still remains a degree of flexibility in their interpretation and gaps between rules. It is alleged that management practises “creative compliance” to influence the picture of financial performance portrayed in the annual report. This practice is not necessarily “illegal” because it need not violate the letter of any rules, but may challenge their spirit. Since accounting is an integral part of the regulation and governance of the corporation, the practice of creative compliance makes accounting regulation appear weak and ineffective. Traces and analyses the objectives underlying the design and implementation of one major creative accounting scheme through a case study of financial innovation in convertible securities. The evidence highlights the pressures on management to perform on specific accounting ratios, and the extent to which companies were willing to go (with assistance from bankers and lawyers) to practise creative accounting. Shows that the conventional restraints on these practices, such as auditors, analysts and the media, have not been effective. What emerges is an unbalanced conflict between the regulators and the regulated corporations, where the latter, having access to significant financial and professional resources, appear to have a consistent upper hand.
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Discusses legal and tax issues surrounding the structuring ofconvertible mortgages. Concludes that convertible mortgages can bestructured in the UK, but the complexity from a tax…
Abstract
Discusses legal and tax issues surrounding the structuring of convertible mortgages. Concludes that convertible mortgages can be structured in the UK, but the complexity from a tax viewpoint restricts their application to high value properties. Cautions that tax implications must be examined in great detail before structuring.
Juan David Gonzalez-Ruiz, Alejandro Arboleda, Sergio Botero and Javier Rojo
The purpose of this paper is to develop an investment valuation model using the mezzanine debt mechanism based on blue bonds that explicitly allude to public–private partnerships…
Abstract
Purpose
The purpose of this paper is to develop an investment valuation model using the mezzanine debt mechanism based on blue bonds that explicitly allude to public–private partnerships (P3s) and project finance (PF). Additionally, this study proposes the financial captured value (FCV) theory for measuring how much financial value lenders may capture by becoming sponsors through financing of sustainable infrastructure systems (SIS).
Design/methodology/approach
The investment valuation model was validated through the Aguas Claras wastewater treatment plant as a case study.
Findings
The empirical results show that lenders may capture financial value by converting outstanding debt into equity shares throughout the operation and maintenance stage. Furthermore, case study results provide new insights into the implications of the debt–equity conversion ratio on the relationship between the sponsors’ internal rate of return and the FCV.
Research limitations/implications
The most significant limitation is the lack of primary and secondary information on blue bonds. Thus, robust statistical analyses to contrast results were not possible.
Practical implications
Researchers and practising professionals can improve their understanding of how mezzanine debt, P3s and PF into an investment valuation model allows financing SIS using a non-conventional financial mechanism. The recommendations will benefit both the academia as well infrastructure industry in bridging the gap between design theory and practice.
Originality/value
Sustainability components have not been addressed explicitly or combined in the financing’s structuring. Therefore, the investment valuation model could be considered a novel methodology for decision making related to financing and investment of SIS.
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