Advertisement

Why firms issue convertible debt — Market timing and investor rationing

Abstract

Available theories for the use of convertible debt emphasize the security’s useful role in mitigating costs of external debt and equity finance that arise due to capital market imperfections. Green (1984) argues that convertible debt eliminates risk-shifting incentives and aligns the interests of stock- and bondholders.4. Stein (1992) shows that firms with valuable investment opportunities can use convertible debt to reduce the costs of adverse selection arising in equity issues41, and Mayers (1998) illustrates that convertible debt can alleviate costs of free cash flow.42 Empirical tests of the short-term valuation impact of convertible debt offerings support the implications of these theories: convertible debt issues on average entail higher announcement returns than equity issues.43

Keywords

Propensity Score Stock Price Abnormal Return Equity Issue Free Cash Flow 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Copyright information

© Deutscher Universitäts-Verlag|GWV Fachverlage GmbH, Wiesbaden 2006

Personalised recommendations