Financial Behaviour in a Mandatory Conversion Process: Empirical Evidence from Colombia

Juan David González-Ruiz, Maria Isabel Acosta-García and Ramón Villa-García
Authors registered in the RePEc Author Service: Juan David González-Ruiz

Global Business Review, 2021, vol. 22, issue 1, 69-84

Abstract: Convertible bonds are attractive because they offer alternatives for both issuers and investors. Therefore, several companies have used this financial mechanism to raise capital. Although several studies have been published on this topic, mandatory convertible bonds (MCBs), which are subsets of convertible bonds, and their effect on economic value added (EVA) have not been explored deeply. This study analyses what happens to the EVA before, during and after the issuance when investors are involved as shareholders of a company issuing MCBs. A Colombian company is used as a case study. The results reveal that one of the main reasons behind the change in the EVA is not only the weighted average cost of capital or the invested capital but also the operating profit. The net operating profit after tax (NOPAT) depends on operating profit. Therefore, to generate a positive EVA, the NOPAT margin needs to be higher than the margin of financing costs.

Keywords: Mandatory convertible bonds; shareholder value; bondholder; WACC; EVA; case study (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:globus:v:22:y:2021:i:1:p:69-84

DOI: 10.1177/0972150920964007

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