What Drives the Issuance of Putable Convertibles: Risk-Shifting, Asymmetric Information, or Taxes?

Authors


  • For helpful comments and discussions, we thank Debarshi Nandy, Susan Shu, Bob Taggart, Hassan Tehranian, Chris Veld, An Yan, as well as seminar participants at Boston College, Lehigh University, Seton Hall University, Suffolk University, and conference participants at the 2009 Financial Intermediation Research Society Meetings, the 2006 European Finance Association Meetings, the 2006 Financial Management Association Meetings, and the 2005 Southern Finance Association Meetings. We also thank Rayna Kumar for excellent research assistance. Special thanks to an anonymous referee and Bill Christie (the editor) for several helpful comments. We alone are responsible for any errors or omissions.

Abstract

This paper presents the first empirical analysis of firms’ rationale for issuing putable convertible bonds in the literature. We distinguish between three possible rationales for the issuance of putable convertibles: 1) the risk-shifting hypothesis, 2) the asymmetric information hypothesis, and 3) the tax savings hypothesis. The results of our empirical analysis can be summarized as follows. First, putable convertible issuers are larger, less risky firms, having larger cash flows, smaller growth opportunities, and lower bankruptcy probabilities as compared to ordinary convertible issuers. Second, putable convertible issuers have lower preissue market valuations, more favorable announcement effects, and better postissue operating performance when compared to ordinary convertible issuers. Third, putable convertible issuers have better postissue long-run stock return performance as compared to ordinary convertible issuers. Finally, putable convertible issuers typically have greater tax obligations and better credit ratings than ordinary convertible issuers. Overall, the results of our univariate as well as multivariate analyses provide support for the asymmetric information and tax savings hypotheses, but little support for the risk-shifting hypothesis.

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