Abstract

We conduct interviews with financial managers in Australia, Canada, the U.K., and the U.S. to study the question why companies issue convertible bonds. For the vast majority of the firms, convertible bonds are chosen because managers find straight debt too costly. Convertible bonds are preferred to equity either because of the pecking order or because of managers ’ perceived equity undervaluation and share dilution. Our results suggest that managers time the issuance of convertible bonds based on the demand of the investors and the misvaluation of the firms ’ debt and equity. The evidence lends considerable support to the theory of management-investor differences in opinion about firm’s risk, but yields very little support to the theories of risk shifting, sequential financing, or backdoor equity.

Citations