Investment and financing activity following calls of convertible bonds

Convertible Debt and Risk‐shifting Incentives

“…Debt maturity is longer for firms with convertible debt. This result is consistent with Alderson, Betker, and Stock (2006), who document that convertible debt has relatively long maturity.…”

Risk Changes around Calls of Convertible Bonds

“…Korkeamaki and Moore (2004) examine the security design implications of sequential financing and find that, consistent with the theory, firms that issue convertible bonds with weaker call protection provisions or shorter call protection periods tend to invest more following the convertible offering. In contrast, Alderson, Betker, and Stock (2006) find that firms that call out‐the‐money convertible bonds exhibit increases in investment and financing activity around the year of the call. This finding contradicts the basic premise of the theory that firms will be able to increase investment only when the market has been persuaded that the firm has found a valuable opportunity, and hence when conversion can be forced by the call 2…”

“…In Stein's (1992) theory, the call provision helps high‐quality firms avoid financial distress because they are able to force conversion, in contrast to low‐quality firms, which end up in distress. A convertible bond call is thus a leverage‐decreasing event unrelated to the calling firm's asset structure (Alderson, Betker, and Stock, 2006, p. 898). Therefore, we contend that the theory predicts a decrease in the calling firm's equity beta and no change in the asset beta (i.e., operating risk) following the call.…”

Where Are They Now? An Analysis of the Life Cycle of Convertible Bonds

“…This latter point is challenged byAlderson, Betker and Stock (2006), who report that investment behavior of convertible issuers who force conversion on their convertibles is not different from those convertible issuers who call their convertibles out of the money. However, a recent study byChen, Mao and Wang (2010) provides a rationale for a connection between investment patterns and call behavior even in the absence of a conversion option, suggesting that calls of out-of-the-money convertibles could also be motivated by increasing investments by the firm.…”

“…In theGrundy and Verwijmeren (2012) sample (bonds issued between 2000and 2006, 93% of the sample retires either through a call, a delisting, or is still running at the time of the observation.…”