Determinants of the stockholder reactions to convertible debt offering announcements: an analysis of the Western European market.

This paper examines the determinants of the stockholder reactions to convertible debt announcements made by Western European companies. We simultaneously test the impact of issuer characteristics, security design features, the stated uses of proceeds and the aggregate convertible debt issue volume. Our evidence suggests that the announcement returns are positively influenced by the maturity and conversion premium, and negatively influenced by the Eurobond feature, the level of post-conversion equity dilution and the aggregate convertible debt volume. We also document significant interaction effects between the issuer characteristics, the convertible debt design and the convertible debt market condition. First, we find that hot market convertibles are structured to be more 'debt-like' than non-hot market convertibles. Second, we show that the influence of the issuer characteristics depends on the convertible debt design: equity-like convertibles are perceived as instruments able to reduce adverse selection and financial distress costs, whereas debt-like convertibles are perceived as predominantly straight debt. Lastly, we demonstrate that issuer and security characteristics have much more power for explaining the investor reactions during non-hot markets than during hot markets.Determinants; Market; Companies; Characteristics; Security design; Design; Premium; Effects; Selection; Costs; Markets;

Are European convertibles more debt-like than the US issues? An empirical analysis.

The popular financial press often suggests that convertible debt issued by European firms is more debt-like in nature than convertible debt issued by US firms. This paper is the first to formally test the validity of this common perception. Our evidence indicates that European convertibles are effectively structured to be more debt-like than US convertibles. We also show that European convertible debt announcements induce less negative stockholder reactions than US announcements, which is consistent with the larger debt component of the former securities. Lastly, we explore some potential explanations for the relatively more debt-like design of European convertibles. Our results indicate that this finding may be attributable to both issuer-related and institutional differences across European and US convertible debt markets.Design; Firms; Market; Markets; Research;

Predicting the duration of leveraged buyouts.

We employ newly developed split hazard modeling to estimate the conditional probability that a firm eventually return to public status following a leveraged buyout (LBO), and the conditional probability of reversion to public status in a given year for a firm that eventually may reverse. Our results, based on 343 LBO transactions, imply that not all LBO firms expect eventual reversion to public status. In addition, we find that those LBO decisions that are expected to enhance value the most are less likely to reverse eventually. We also find that eventual reversal probabilities and the timing of reversals for divisional LBOs are not significantly different from full-firm LBOs.Leveraged buyouts;

The recognition of an accounting practice and its timing as signalling tools.

This paper extends the literature on the signalling function of accounting and financial information by investigating the information content of the adoption of a certain accounting practice, namely the recognition of deferred taxes in the financial statements. Specifically, we examine whether (1) the decision to recognise a certain accounting practice, and (2) the timing of the recognition supplement one another as signalling devices. The new accounting law on deferred taxes (Royal Decree of December 30, 1991) requires all Belgian firms to recognise deferred taxes for all grants on the balance sheet as of 30/12/91. The results show that the recognition and the timing of the recognition supplement one another as signalling tools. The immediate recognition of positive deferred taxes signals good news: firms that report positive deferred taxes typically perform better at the time of adoption and in the near future thereafter. Within the class of recognisers, early recognisers perform better than late recognisers. However, this second signal, the timing of the recognition is only used as a second signal for the class of tax-paying firms. Our findings also indicate that the impact on the balance sheet is a significant determinant of the decision to report deferred taxes. Firms where the adoption of deferred taxes would lead to a high increase in the debt/equity ratio are less likely to adopt, or, if they do report deferred taxes, do so later. These results suggest that firms decide not to recognise positive deferred taxes in order to limit the decrease in their solvency position. Indeed, firms that have already experienced a decline in their solvency position are more likely to postpone the recognition of deferred taxes.Accounting; Law; Solvency;

The default risk of high-yield bonds.

This paper investigates the default behavior of original issue rated non-convertible high-yield bonds. The hazard model simultaneously estimates the impact of bond age, firm- and issue-specific characteristics, and changing economic conditions. The specification used models the impact of the time since issuance semi-parametrically, corrects for unobserved heterogeneity and allows for the possibility that outstanding bonds may default in the future. Our findings, based on a sample of 579 individual high-yield bonds issued between 1977 and 1989, suggest that, after controlling for annual changes in economic conditions, default rates increase with age. Bond characteristics at the time of issuance also impact the default behavior. BB rated bonds tend to have significantly lower default rates compared to CCC rated bonds; bonds with higher coupon rates have significantly higher default rates. In addition, high-yield bonds issued prior to 1980 experienced significantly lowerd default rates.Default; Risk; Bonds;

Exit and strategic behavior under information and incentive problems in financial markets.

Prior research has documented the impact of firm and industry specific variables in shaping the post-entry exit probability. These studies have found a mixed effect of competition, usually proxied by concentration, upon exit. This paper uses the empirical measure developed by Sundaram, John and John (1996), which captures the theoretical notion of competition in strategic complements versus strategic substitutes. Our results show that the survival of newly established firms is lower when competition is in strategic complements and higher when competition is in strategic substitutes. Furthermore, the evidence suggests predation since the effect of competition depends upon the firm's financial structure and upon the extent of information and incentive problems in financial markets.Markets; Problems;

The trade-off between bank debt and trade credit for business start-ups: Financing costs versus liquidation policy.

This paper investigates the trade-off between bank debt and trade credit for entrepreneurial start-ups. Specifically, we examine how the lower cost of bank debt is weighed against the more lenient liquidation policy adopted by suppliers. Both the riskiness of the venture and the entrepreneur's control rents influence this choice. Using unique data on 325 first-time business start-ups, we find that firms in industries with high historical failure rates and entrepreneurs who value private control benefits use less bank debt. These effects are even strengthened in case assets have a high liquidation value and thus banks are more likely to liquidate the firm following default.Research; Trade; Trade credit; Credit; Startups; Cost; Policy; Suppliers; Choice; Data; Firms; Industry; Entrepreneurs; Value; Effects; Assets; Default; Costs;

The demand for debt finance by entrepreneurial firms.

We model the entrepreneurial firm's choice of debt finance, allowing for debt renegotiations in the event of financial distress. We differentiate two sources of debt finance, bank debt and trade credit, by the implicit equity stake that lenders hold in the borrowing firm. Lenders with a large implicit equity stake, such as suppliers, may adopt a more lenient liquidation policy for their debtors, but then set a higher price for their credit. Entrepreneurs, who have private information about their probability of financial distress, borrow exclusively from lenders with a small implicit equity stake, such as banks, only when the price advantage of bank debt outweighs the cost of a stricter enforcement of liquidation rights. Entrepreneurs who prefer the lenient liquidation policy adopted by suppliers contract only partial bank finance in order to avoid a potential default against the bank later on. We show that the fraction of debt that consists of bank loans depends upon the cash flow in the bad state, the value attributed to control rights and the initial wealth and risk aversion of the entrepreneur.Demand; Entrepreneurs;

Persistence in foreign exchange rates: derivation of the multivariate persistence estimates and associated standard errors.

The paper provides a technical discussion on how the multivariate persistence measures described in VandeGucht, Kwok and Dekimpe (1993) can be estimated both when cointegration is present and absent. Procedures to derive the associated asymptotic standard errors are discussed.Foreign exchange; Foreign exchange rates;

Defining firm exit : the impact of size and age revisited.

This paper demonstrates that (1) the negative relationship between initial firm size and failure probability, and (2) the aging pattern of the failure rate are sensitive to the adopted definitions of entry and exit. We use two definitions to measure the timing of entry and exit: an economic definition, based on employment levels, and a legal definition, based on the firm's legal status. While initial size is negatively related to the exit rate under the economic definition, the relation becomes positive under the legal definition. The aging effect is much steeper under the legal than under the economic definition.Probability; Employment;