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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 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.

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.

Corporate accountability and quality of corporate disclosure have impacted on many companies and banks, particularly those grown through mergers and acquisitions (M&A) and companies have had to restate their financial statements. The growth of service and technology companies (particularly by M&A) presents numerous public policy, legal, regulatory and accounting issues. Some of these companies have substantial intangible assets and the accounting for M&A and investments can be manipulated to affect reported assets and earnings. The exchange of securities and conflicts of interest in such transactions can affect financial statements – all of these factors can distort strategic planning, legal analysis, performance analysis and credit analysis. Fraudulent conveyance has typically not been considered in detail in many real life transactions (processed by law firms, the SEC, accounting firms and banks), even though it is the major means of unfair and illegal wealth transfer and fraud in corporate transactions. This paper highlights some of these issues, and illustrates the role and benefits of proper legal analysis in corporate transactions, and the convergence of corporate financial analysis and legal analysis and tax/accounting analysis.

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.

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.

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.

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.

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.

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.

The primary objective of this study is to investigate whether the inclusion of convertible bond prices as important inputs into artificial neural networks can lead to improved accuracy in predicting Chinese stock prices. This novel approach aims to uncover the latent potential inherent in convertible bond dynamics, ultimately resulting in enhanced precision when forecasting stock prices.

The authors employed two machine learning models, namely the backpropagation neural network (BPNN) model and the extreme learning machine neural networks (ELMNN) model, on empirical Chinese financial time series data.

The results showed that the convertible bond price had a strong predictive power for low-market-value stocks but not for high-market-value stocks. The BPNN algorithm performed better than the ELMNN algorithm in predicting stock prices using the convertible bond price as an input indicator for low-market-value stocks. In contrast, ELMNN showed a significant decrease in prediction accuracy when the convertible bond price was added.

This study represents the initial endeavor to integrate convertible bond data into both the BPNN model and the ELMNN model for the purpose of predicting Chinese stock prices.

In February 2015, Suzlon had just completed its financial and asset restructuring, following financial default after rapid growth through debt financed acquisitions in the financial boom ending in 2008. The restructuring resulted in a significant decrease in the promoter's equity stake. Suzlon now has to decide how to respond to an offer by the DilipSanghvi Group, promoters of Sun Pharma, to acquire a large equity stake in Suzlon for Rs. 1,800 crore. If Suzlon were to accept the offer then both the existing promoters and the DilipSanghvigroup would have the same stake of about 22% each. The case will help students examine the need to align financing and business strategy on the same plane. It will also help them understand details about restructuring of financial and business strategy in the face of financial distress.

In this chapter we concentrate at the most popular model for convertible bond (CB) valuation in a one-factor, stochastic underlying stock price setting. Through the last decade, the Tsiveriotis–Fernandes model (1998) has become a widely commented model that involves the state of default of the issuer of the CB. A routine approach to the solution of this model is the usage of methods of finite difference schemes (FDS). However, for many people trained in finance these methods are not very intuitive and they tend to ignore them and prefer to use binomial-tree approach as more intuitive technique. For that reason, our primary focus is to highlight the answer of the so far unanswered question: Does the binomial-tree approach to CBs provide accurate pricing, hedging, and risk assessment? We show on a set of representative examples that by using binomial-tree methodology one is unable to provide a consistent analysis of the pricing, hedging, and risk assessment. We start the chapter with the basics of CBs and CB market. We then explain the implementation of TF model within binary-tree approach. We conclude the chapter with performance valuation of binomial-tree approach showing unexpected behavior in practice areas such as pricing (profile of CB's price versus underlying stock price), hedging (performance of CB's delta, gamma, and convertible arbitrage strategy versus underlying stock), and risk assessment (Monte Carlo VaR with respect to the underlying).

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).

The investment valuation model was validated through the Aguas Claras wastewater treatment plant as a case study.

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.

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.

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.

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.

The purpose of this paper is to examine the extent of risk shifting behavior in bonds and sukuk. The examination is significant, as economists and scholars identify risk shifting as the primary cause of the global financial crisis. Yet, the dangers of this debt-financing feature are largely ignored – one needs to only witness the record growth of global debt even after the global financial crisis.

To identify the signs of risk shifting existence in the corporations, this paper compares each corporation’s operating risk before and after issuing debt. Operating risk or risk of a firm’s activities is measured using the volatility of the operating earnings or coefficient variation of earning before interest, tax, depreciation and amortization (EBITDA). Using EBITDA as the variable offers one distinct advantage to using asset volatility as previous research has – EBITDA can be extracted directly from firms’ accounting data and is not model-specific.

Risk shifting can be found in not only the bond system but also the debt-based sukuk system – a noteworthy finding because sukuk, supposedly in a different class from bonds, have been criticized in some quarters for their apparent similarity to bonds. On the other hand, this study thus shows that equity feature, when it is embedded in bonds (as in convertible bonds) or when a financial instrument is based purely on equity (as in equity-based sukuk), the incentive to shift the risk can be mitigated.

Global awareness of the dangers of debt should be increased as a means of reducing the amount of debt outstanding globally. Although some regulators suggest that sukuk replace debt, they must also be aware that imitative sukuk pose the same threat to efforts to avoid debt. In short, efforts to ensure future financial stability cannot address only debts or bonds but must also address those types of sukuk that mirror bonds in their operation. In the wake of the global financial crisis, amid the frantic search for ways of protecting against future financial shocks, this analysis aims to help create future stability by encouraging market players to avoid debt-based activities.

This paper differs from the previous literature in two important ways, viewing risk shifting behavior not only in relation to debt or bonds but also when set against debt-based sukuk, which has been subjected to similar criticism. Indeed, to the extent that debts and bonds encourage risk shifting behavior and threaten the entire financial system, so, too, can imitation sukuk or debt-based sukuk. Second, this paper is unique in exploring the ability of equity features to curb equity holders’ incentive to engage in risk shifting behavior. Such an examination is necessary for the wake of the global financial crisis, for researchers and economists now agree that risk shifting must be a controlled behavior – and that one way of controlling risk shifting is by implementing the risk sharing feature of equity-based financing into the financial system.