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The role of time value in convertible bond call policy

Emanuele Bajo () and Massimiliano Barbi ()

Journal of Banking & Finance, 2012, vol. 36, issue 2, 550-563

Abstract: Since the seminal work of Ingersoll (1977b) the optimal time in which a firm should redeem its outstanding convertible bonds has received large attention by the financial literature. Several studies have put forward a number of possible costs and benefits for a firm if it interrupts the life of its convertible bonds prior to their contractual maturity. However, in this paper we argue that the managerial decision to call back a convertible bond is mainly driven by a fundamental variable almost neglected up until now: the time value extraction from bondholders’ conversion option. Accordingly, we propose a measure for the effective convenience of calling—which we define as net time value advantage—and we show, using a survival analysis, that it is more effective than previously proposed measures in explaining the firms’ observed call policy.

Keywords: Convertible bonds; Time value; Call policy; Fixed income (search for similar items in EconPapers)
JEL-codes: G14 G32 (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:550-563