Convertible security design and contract innovation

Craig M. Lewis and Patrick Verwijmeren

Journal of Corporate Finance, 2011, vol. 17, issue 4, 809-831

Abstract: This paper studies convertible security design for a sample of 814 issuers over the years 2000 through 2007. Using a nested logit model, we examine how firms choose fixed income claims and the method of payment. We find that fixed income claims are chosen to reduce corporate income taxes, minimize refinancing costs, and help mitigate managerial discretion costs. The method of payment choice frequently includes cash settlement features because they increase reported diluted earnings per share. Some of the cash settlement issuers also adopt other innovative financial strategies (share repurchase programs and call spread overlays) that inflate reported earnings per share. We find that firms needing debt capacity include mandatory conversion features.

Keywords: Convertible; security; financing; Convertible; debt; Convertible; preferred; stock; External; finance; Security; choice; decision; Security; design; Cash; settlement; Net; share; settlement; Mandatory; conversion (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:17:y:2011:i:4:p:809-831

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