Why do companies issue convertible bond loans? An empirical analysis for the Canadian market

Citation

Loncarski I, ter Horst J & Veld C (2008) Why do companies issue convertible bond loans? An empirical analysis for the Canadian market. Canadian Journal of Administrative Sciences, 25 (3), pp. 214-236. https://doi.org/10.1002/cjas.64

Abstract
To identify issuer motives, we study the determinants of announcement effects of convertible debt issues in the Canadian market. Classified into equity- and debt-like, wealth effects are significantly more negative for equity-like convertible bond issuers. Equity-like convertibles are significantly negatively affected by agency costs of equity. However, agency costs of debt have no significant effect on debt-like convertibles. Consistent with Stein (1992), this suggests convertibles in particular represent a substitute for equity. Moreover, convertible debt offers announced by income trusts experience significantly less negative wealth effects than offers by nontrusts - a finding explained by a more debt-like convertible design, very low agency costs of equity in case of income trusts, or both.

Keywords
Security issuance decision; Convertible bonds; Wealth effects; Agency costs; Convertible bonds; Corporations Finance Canada

Journal
Canadian Journal of Administrative Sciences: Volume 25, Issue 3