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

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

An Empirical Comparison of Convertible Bond Valuation Models

“…Loncarski, ter Horst, and Veld (2008), who study motives for the issuance of convertible bonds in Canada, find that convertible bonds issued by income trusts are more debt‐like and that convertible bonds issued by ordinary corporations are more equity‐like. This difference may explain the fact that convertibles issued by income trusts are priced differently from convertibles issued by ordinary corporations.…”

“…This difference may explain the fact that convertibles issued by income trusts are priced differently from convertibles issued by ordinary corporations. In order to test whether this is really the case, we follow the approach of Loncarski et al (2008) and divide the convertible bonds in our study into equity‐like and debt‐like convertibles. Their distinction is based on the Black and Scholes (1973) delta measure 18 .…”

A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?

“…We hence control for conversion premium, the ratio between conversion price and stock price at the issue date. Convertible bond with lower conversion premium is more equity-like, since the probability of conversion should be higher (Loncarski, Ter Horst, & Veld, 2008). This table provides the correlations among our variables for the full sample used in this study.…”

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

“…We also include the delta as a proxy for the size of the equity component of the convertible debt offering in the regression analyses (equally used by Burlacu, 2000;Ammann et al, 2006;Loncarski et al, 2006). While not an exact measure of the equity component embedded in convertibles, the delta is likely to provide a more complete indication of the level of equity-likeness of convertible debt issues than are individual proxies such as the conversion premium or the maturity of the offering (Burlacu, 2000).…”