Determinants of corporate call policy for convertible bonds

King, Tao‐Hsien Dolly; Mauer, David C.

doi:10.1016/j.jcorpfin.2012.06.011

Cited by 39 publications

(52 citation statements)

References 29 publications

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“…This seems to be consistent with some empirical findings of a positive relation between call delay and excess cash balances due to a cautious attitude (see King and Mauer ).…”

Section: Call Provisionsupporting

confidence: 92%

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Agliardi

Spanjers

2015

Int Rev Finance

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Abstract. This paper integrates ambiguity into a contingent claim model for convertible debt. We study how convertible debt valuation is affected by the ambiguity biases of equity holders and debt holders and provide sensitivity analysis of the bond value to changes in attitude toward ambiguity, firm and bond parameters. Our results, which are summarized into six main predictions, are consistent with recent empirical evidence and offer a possible interpretation of some corporate finance puzzles.

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“…This seems to be consistent with some empirical findings of a positive relation between call delay and excess cash balances due to a cautious attitude (see King and Mauer ).…”

Section: Call Provisionsupporting

confidence: 92%

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Agliardi

Spanjers

2015

Int Rev Finance

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“…Asquith and Mullins () show that calls are less likely when dividends exceed after‐tax coupons. Consistent with this observation, Campbell, Ederington, and Vankudre (), Asquith (), and King and Mauer () report longer average call delays for bonds when dividends exceed after‐tax coupons.…”

mentioning

confidence: 72%

“…For empirical investigations of this signaling rationale for call delay, see Ofer and Natarajan (), Acharya (), Campbell, Ederington, and Vankudre (), Ederington, Caton, and Campbell (), Ederington and Goh (), and King and Mauer ().…”

mentioning

confidence: 99%

“…Campbell, Ederington, and Vankudre () examine calls between 1962 and 1985 and report an average delay of 3.32 years, whereas Asquith () reports a shorter average delay over the 1980 to 1993 period of 170.5 days. King and Mauer () examine convertibles issued between 1980 and 2002 and find that for the bonds issued between 1980 and 1989 the average delay is 147 days, whereas for the bonds issued between 1990 and 2002 the average delay is only 41 days.…”

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confidence: 99%

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Disappearing Call Delay and Dividend‐Protected Convertible Bonds

Grundy¹,

Verwijmeren²

2016

The Journal of Finance

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Firms do not historically call their convertible bonds as soon as conversion can be forced.A number of explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely, dividend protection of convertible bond issues. Dividend protection means that the conversion value of the convertible bond is unaffected by dividend payments and that dividend-related rationales for call delay become moot. We document that call delay is near zero for dividend-protected convertible bonds. 2 This paper documents the rapid rise of callable convertibles that are dividend-protected, and the ensuing effect on convertible bond call policy. When a convertible is dividendprotected and a dividend is distributed, the number of shares to be received upon conversion increases so as to leave the bond's conversion value unchanged. We find that call delay is near zero for dividend-protected convertible bonds. The link between dividend protection and diminished call delay highlights the importance of dividends for understanding convertible bond call policy.Calling a convertible bond will force conversion provided the conversion value exceeds the call price. Ingersoll (1977a) and Brennan and Schwartz (1977) model settings in which shareholder wealth is maximized by calling to force conversion whenever feasible. Forced conversion deprives convertible bondholders of the combined value of the insurance they have as bondholders able to demand the bond's principal value at maturity (rather than the bond's conversion value at maturity) and any income advantage from the coupons they receive in excess of the dividends received in the event of conversion. Ingersoll (1977b) documents that in practice a substantial number of firms delay calling relative to this policy, reporting that on average firms wait until the conversion value exceeds the call price by 43.9%. Asquith and Mullins (1991) observe that studies on call delay are important since a failure to empirically confirm clear predictions of finance theory calls into question the validity of the models. Not surprisingly, researchers have responded to Ingersoll's analysis by considering alternate theories of convertible bond call policy. Theoretical explanations of call delay can be classified into two groups: explanations that are 3 unrelated to the firm's dividend policy, and explanations that are dependent on the firm's dividend policy.There are two explanations unrelated to dividend policy. One is that the costs of a failed call along with a required call notice period can lead firms to delay calling until a bond's conversion value exceeds its call price by a sufficient safety premium. 1 The other is that call delay can be a credible signal that management believes that the conversion value of the bond will exceed its face value at maturity and hence that there is little to be gained by forcing conversion early since bondholders will convert at maturity (Harris an...

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“…At the opposite end, for some rare cases, there are \early" calls that are out-of-themoney; that is, the conversion value is lower than the call price. The literature has been rich in both the theoretical and empirical studies of various corporate finance issues that influence the optimal call policies (Sarkar, 2003;King and Mauer, 2014). The challenge is how to incorporate these corporate finance considerations into the pricing models without adding too much complication in the modeling of the corporate structure of the issuer firm and market microstructure.…”

Section: Determinants Of Issuers' Call Policiesmentioning

confidence: 99%

Game option models of convertible bonds: Determinants of call policies

Kwok

2014

J. Finan. Eng.

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The interaction of bondholder's conversion and issuer's call in a convertible bond leads to a game option model between the two counterparties. Like typical pricing models for corporate debts, the fair value of a convertible bond is highly dependent on issuer's credit risk, tax benefits of coupons and other structural features. The convertible bond pricing models in the literature can be categorized into two approaches: (i) structural firm value models that incorporate dilution effect in the issuer firm's corporate structure upon conversion; and (ii) reduced form models that price convertible bonds based on calibration with market liquid instruments. We review and comment on various pricing formulations of convertible bonds and effectiveness of different numerical schemes for solving the associated optimal stopping problems. Empirical studies on issuers' optimal call policies have revealed discrepancies between the optimal decision rule derived from pricing models and actual market practices. The more refined model formulation of a convertible bond should include corporate finance considerations in the determination of the optimal call policies.

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Determinants of corporate call policy for convertible bonds

Cited by 39 publications

References 29 publications

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Convertible Debt: Financing Decisions and Voluntary Conversion under Ambiguity

Disappearing Call Delay and Dividend‐Protected Convertible Bonds

Game option models of convertible bonds: Determinants of call policies

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