Determinants of Convertible Bond Structure

Sudha Krishnaswami and Devrim Yaman
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Sudha Krishnaswami: University of New Orleans
Devrim Yaman: Western Michigan University

No 2005-04, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: Theoretical research argues that convertible bonds mitigate the contracting costs of moral hazard, adverse selection, and financial distress. Using firm-specific and macroeconomic factors of the contracting costs, we examine the extent to which they impact the likelihood of issuance and the structure of convertible bonds. Our evidence indicates that moral hazard, adverse selection, and expected financial distress costs are all important determinants of the likelihood of issuing convertible bonds over straight bonds. We also analyze the structure of convertible bonds issued by studying whether these bonds are more debt-like or equity-like. The evidence indicates that moral hazard costs do not influence bond structure, while adverse selection costs are somewhat important in determining the structure. Expected financial distress costs have the strongest statistical and economic impact on convertible bond structure.

Keywords: Convertible bonds; Moral hazard; Adverse selection; Financial Distress (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2005
New Economics Papers: this item is included in nep-cfn, nep-fin and nep-fmk
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