Financing decisions: The case of convertible bonds

Luca Del Viva and Menatalla El Hefnawy

International Review of Financial Analysis, 2020, vol. 67, issue C

Abstract: Research studying firms' motivations to issue convertible bonds remains far from complete. This paper aims to provide further understanding of firms' motives behind issuing convertible bonds. We propose a theoretical model that explains issuers' choice between convertibles and equity when raising a required amount of capital by comparing the cash flow streams of both alternatives in order to maximize the firm's value for the current shareholders. We derive a closed form solution of our theoretical model both in absence and presence of default risk. Our model suggests that issuing convertible bonds is preferred to a direct stock issuance if the expected return of convertible bonds is lower than the expected return of common stocks. Empirical findings confirm our theoretical predictions.

Keywords: Convertible bonds; Equity; Hybrid instruments; Financing decisions; Credit risk (search for similar items in EconPapers)
JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:67:y:2020:i:c:s1057521918307919

DOI: 10.1016/j.irfa.2019.101393

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