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The consequences of issuing convertible bonds: Dilution and/or financial restructuring?

Author

Listed:
  • Roland Gillet

    (PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne)

  • Hubert de La Bruslerie

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

Abstract
Historically, most convertible bond (CB) issues have been converted to equity sooner or later. The announcement of a CB issue will bring about a future dilution of the firm's capital, and is often followed by a drop in share price. However, a CB issue by itself creates future value for the shareholders if it enables the firm to make profitable investments. It can also issue a positive signal regarding the restructuring of the firm's financial liabilities and its attempts to optimise its financial structure. These positive effects, if they occur, will develop gradually after the issue, and cannot be identified by a simple short-term event analysis of a CB issue announcement. In this paper, we test the significance of the dilution effect, coupled with a possible value creation effect, using data from the French stock market. We introduce a comparison between dilutive convertibles and non-dilutive exchangeable bonds. By integrating different corrections and by selecting a window of analysis over a longer period after the announcement of the issue, we show that the negative cumulative average abnormal returns generally observed in previous studies become non-significant. This absence of global incidence is indicative of large differences in individual behaviour by issuers of CBs, and leads us to take into account the strategic choices linked to the issue of a CB. Two goals, often described as 'investment financing' or 'financial restructuring', may exist when issuing, and may appear to explain the size of the abnormal returns.

Suggested Citation

  • Roland Gillet & Hubert de La Bruslerie, 2010. "The consequences of issuing convertible bonds: Dilution and/or financial restructuring?," Post-Print halshs-00674248, HAL.
    • Handle: RePEc:hal:journl:halshs-00674248
    DOI: 10.1111/j.1468-036X.2008.00464.x
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00674248v1
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    Cited by:

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    2. Angel Huerga & Carlos Rodríguez-Monroy, 2019. "Mandatory Convertible Bonds and the Agency Problem," Sustainability, MDPI, vol. 11(15), pages 1-21, July.
    3. Angel Huerga & Carlos Rodríguez-Monroy, 2019. "Mandatory Convertible Notes as a Sustainable Corporate Finance Instrument," Sustainability, MDPI, vol. 11(3), pages 1-26, February.

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    More about this item

    Keywords

    convertible bonds; debt leverage; corporate financing decision; stock market efficiency; event studies;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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