Why and how firms issue convertible debt: An empirical analysis of the convertible financing decision.

摘要

Convertible debt has been an important source of capital for U.S. firms for over a century and its popularity has been on the rise in the last 20 years. However, why firms issue convertibles still remains an unresolved question. Even though a number of hypotheses have been proposed to explain the use of convertible debt, our knowledge of firms' motivations in selecting convertibles instead of straight debt or equity at a given point in time is still quite limited. Further, even though a majority of convertible bond offerings are placed privately, particularly in the Rule 144A market, the reasons for the choice of a particular placement type over others are not well identified. With this study, my objectives are: (a) to improve our understanding of the rationale for using convertible debt; (b) identify the determinants of the placement structure firms choose for their convertible debt offerings and (c) examine the interaction between the conversion option and placement structure. In addition, I examine Rule 144A placements of convertibles separately from traditional private placements to account for the institutional differences between these two markets. To achieve these objectives, I perform empirical tests of a number of hypotheses that have been proposed by financial economists to explain firms' motivations for issuing convertible debt and for using private placements. For this, I use a large set of public, private and Rule 144A placements of convertible debt, equity and straight debt issues. More specifically, I employ limited-dependent-variable models to analyze firms' incremental financing choices among convertibles, straight debt and equity. I also follow a similar methodology to model firms' placement structure choice among public, traditional private and Rule 144A placements for their new convertible debt offerings.