Why Firms Issue Convertible Bonds: The Matching of Financial and real Investment Options

D. Mayers

The A. Gary Anderson Graduate School of Management from The A. Gary Anderson Graduate School of Management. University of California Riverside

Abstract: This paper proposes that corporations use callable, convertible bonds to lower the issuance costs of sequential financing. Sequential financing helps control over-investment incentives, that can arise if financing is provided prior to an investment option's maturity, but incurs additional issue costs. A convertible bond's conversion option reduces these costs while helping to control the over-investment incentive. Evidence of important investment and financing activity around the time convertible bonds are called and converted supports the hypothesis. The evidence shows significant increases in capital expenditures and new long-term debt financing starting in the year of the call.

Keywords: ENTERPRISES; DEBT; FINANCIAL MARKET (search for similar items in EconPapers)
JEL-codes: D21 G30 (search for similar items in EconPapers)
Pages: 21 pages
Date: 1996
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Persistent link: https://EconPapers.repec.org/RePEc:fth:caland:96-24

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