Industry conditions, growth opportunities and market reactions to convertible debt financing decisions

Craig M. Lewis, Richard J. Rogalski, James Seward

Research output: Contribution to journalReview article

47 Citations (Scopus)

Abstract

Firms that issue convertible debt have high debt- and equity-related costs of external finance. Existing theories of convertible debt finance differ primarily in their identification of the specific causes of the debt- and equity-related costs of external finance. To assess the theoretical issuance motives separately, we propose a simple framework that characterizes how issuers should design convertible debt to efficiently mitigate specific debt- and equityrelated costs of external finance. We provide evidence from 588 security offer announcements that supports the hypotheses that: (1) convertible debt can be designed to mitigate different combinations of debt- and equity-related costs of external finance and (2) share price reactions depend on the security design decisions. The results also illustrate that the relations between firm value, financial leverage, investment opportunities, and the rate of future growth are more complex among convertible debt issuers than situations where firms issue standard financial securities.

Original languageEnglish (US)
Pages (from-to)153-181
Number of pages29
JournalJournal of Banking and Finance
Volume27
Issue number1
DOIs
StatePublished - Jan 1 2003

Fingerprint

Financing decisions
Industry
Market reaction
Convertible debt
Debt financing
Growth opportunities
Debt
External finance
Costs
Equity
Investment opportunities
Firm value
Announcement
Financial security
Security design
Share prices
Price reaction
Financial leverage
Debt finance

Keywords

  • Covertible debt financing
  • External finance
  • Security choice decisions
  • Security design

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Industry conditions, growth opportunities and market reactions to convertible debt financing decisions. / Lewis, Craig M.; Rogalski, Richard J.; Seward, James.

In: Journal of Banking and Finance, Vol. 27, No. 1, 01.01.2003, p. 153-181.

Research output: Contribution to journalReview article

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