Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity?

Marie Dutordoir and Linda Van de Gucht

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt- and equity-related financing costs. Therefore, it is a puzzle why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model incorporating convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is also reflected in the highly debt-like design of most European convertible issues. In addition, we show that economy-wide and country-specific factors have a significant incremental impact on the convertible debt choice.

Keywords: Convertible Debt; Security Choice; Security Design; Western Europe (search for similar items in EconPapers)
JEL-codes: G12 G3 M (search for similar items in EconPapers)
Date: 2006-10-30
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Citations: View citations in EconPapers (3)

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