Essays on the Use of Convertible Bonds and the Security Issuance Decision.

This dissertation examines two topics, the use of convertible bonds by Canadian companies and the security issuance choice in the Canadian market. The first part of the dissertation is devoted to the use of convertible debt by Canadian companies. Practitioners most often view convertibles as delayed equity and claim to issue them because of the lower coupon rate and to “sweeten” the debt issue, which would be otherwise more difficult to place. On the other hand, academics have proposed theories that in general suggest that companies that face high debt- and/or equity-related agency costs could benefit from issuing convertible debt as opposed to other “straight” means of financing. Chapter 2 provides the literature overview of the motives for the issuance of convertible debt. Chapter 3 investigates motives for the use of convertible debt in the Canadian market. Chapter 6 analyzes a convertible arbitrage in the Canadian market, a strategy mainly used by hedge funds to exploit underpricing of convertible bonds. The second part of the dissertation analyzes the security issuance decision in the Canadian market. The security issuance decision is essentially a capital structure decision. Different explanations have been put forward in the past as to how and when managers decide to increase or decrease the leverage of the firm, such are the pecking-order model, the market timing model and the agreement between insiders and outsiders. Chapter 4 examines the determinants of security issuance choice in the Canadian market, while Chapter 5 investigates the relationship between short interest and some of the capital structure theories.

Why do Companies issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market

We examine the wealth effects associated with the announcements of convertible debt offerings in the Canadian market for the period between 1991 and 2004.The average wealth effect for the three day event window is a significantly negative -2.7%.This result is in line with previous studies on other Anglo-Saxon markets, but it is different from other markets where generally no effect or even a positive effect is found.In addition, support is found for the negative effect of both debt- and equity-related agency costs.Event study;convertible bonds;wealth effects;agency costs

The Convertible Arbitrage Strategy Analyzed

This paper analyzes convertible bond arbitrage on the Canadian market for the period 1998 to 2004.Convertible bond arbitrage is the combination of a long position in convertible bonds and a short position in the underlying stocks. Convertible arbitrage has been one of the most successful strategies of hedge funds.This paper shows that the convertible arbitrage strategy has considerable effects on capital markets.First, there is a downward pressure on cumulative average abnormal returns of the underlying stocks between the announcement and the issuance dates of convertible bonds.Second, short sales of the underlying equity around the issuance dates strongly increase for equity-like convertibles. Third, convertible bonds are underpriced at the issuance dates.All effects are stronger for equity-like than for debt-like convertible bonds.Finally, we find that over a one-year period following the issue, equity-like convertibles earn a return that is more than 23 percentage points higher than the return of debt-like convertibles.In the last years of our sample, convertible arbitrage returns have strongly decreased.This seems to be related to a shift from equity-like to debt-like convertibles by the issuing companies.convertible arbitrage;short sales;underpricing;convertible bonds;abnormal returns

Why do Companies issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market

We examine the wealth effects associated with the announcements of convertible debt offerings in the Canadian market for the period between 1991 and 2004.The average wealth effect for the three day event window is a significantly negative -2.7%.This result is in line with previous studies on other Anglo-Saxon markets, but it is different from other markets where generally no effect or even a positive effect is found.In addition, support is found for the negative effect of both debt- and equity-related agency costs.

The Convertible Arbitrage Strategy Analyzed

This paper analyzes convertible bond arbitrage on the Canadian market for the period 1998 to 2004.Convertible bond arbitrage is the combination of a long position in convertible bonds and a short position in the underlying stocks. Convertible arbitrage has been one of the most successful strategies of hedge funds.This paper shows that the convertible arbitrage strategy has considerable effects on capital markets.First, there is a downward pressure on cumulative average abnormal returns of the underlying stocks between the announcement and the issuance dates of convertible bonds.Second, short sales of the underlying equity around the issuance dates strongly increase for equity-like convertibles. Third, convertible bonds are underpriced at the issuance dates.All effects are stronger for equity-like than for debt-like convertible bonds.Finally, we find that over a one-year period following the issue, equity-like convertibles earn a return that is more than 23 percentage points higher than the return of debt-like convertibles.In the last years of our sample, convertible arbitrage returns have strongly decreased.This seems to be related to a shift from equity-like to debt-like convertibles by the issuing companies.

Wealth effects of convertible-bond and warrant-bond offerings: a meta-analysis

The literature on wealth effects associated with the announcements of convertible-bond and warrant-bond offerings is reviewed. The findings of 35 event studies, which include 84 sub-samples and 6310 announcements, are analysed using meta-analysis. We find a mean cumulative abnormal return of −1.14% for convertibles compared with −0.02% for warrant bonds, the significant difference confirming a relative advantage for warrant bonds. Abnormal returns for hybrid securities issued in the USA are significantly more negative than those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within our cross-study models, suggesting that more evidence is needed to confirm whether they are robust

Essays on the use of convertible bonds and the security issuance decision

This dissertation examines two topics, the use of convertible bonds by Canadian companies and the security issuance choice in the Canadian market. The first part of the dissertation is devoted to the use of convertible debt by Canadian companies. Practitioners most often view convertibles as delayed equity and claim to issue them because of the lower coupon rate and to “sweeten” the debt issue, which would be otherwise more difficult to place. On the other hand, academics have proposed theories that in general suggest that companies that face high debt- and/or equity-related agency costs could benefit from issuing convertible debt as opposed to other “straight” means of financing. Chapter 2 provides the literature overview of the motives for the issuance of convertible debt. Chapter 3 investigates motives for the use of convertible debt in the Canadian market. Chapter 6 analyzes a convertible arbitrage in the Canadian market, a strategy mainly used by hedge funds to exploit underpricing of convertible bonds. The second part of the dissertation analyzes the security issuance decision in the Canadian market. The security issuance decision is essentially a capital structure decision. Different explanations have been put forward in the past as to how and when managers decide to increase or decrease the leverage of the firm, such are the pecking-order model, the market timing model and the agreement between insiders and outsiders. Chapter 4 examines the determinants of security issuance choice in the Canadian market, while Chapter 5 investigates the relationship between short interest and some of the capital structure theories.