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Capital Structure Management As A Motivation For Calling Convertible Debt

Author

Listed:
  • Douglas R. Emery
  • Mai E. Iskandar‐Datta
  • Jong‐Chul Rhim

Abstract

Using a matched‐pairs methodology, we present empirical evidence of systematic changes within a corporation that are associated with calls of convertible debt. We find that calling firms experience significantly greater growth than noncalling firms in the same industry, as measured by retained earnings and long‐term debt. Also, the converted debt provides a significant source of new book equity, and calling firms issue significantly less other new equity. The pattern of growth in balance sheet accounts is consistent with the pecking order hypothesis and supports the notion that some firms call convertible debt to reduce their total cost of obtaining additional external financing. The evidence also shows that, on average, calling firms experience a significant decline in their leverage ratio based on book value but no significant change in their leverage ratio based on market value of equity. This is consistent with the call's being used as part of the firm's management of its capital structure.

Suggested Citation

  • Douglas R. Emery & Mai E. Iskandar‐Datta & Jong‐Chul Rhim, 1994. "Capital Structure Management As A Motivation For Calling Convertible Debt," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 17(1), pages 91-104, March.
    • Handle: RePEc:bla:jfnres:v:17:y:1994:i:1:p:91-104
    DOI: 10.1111/j.1475-6803.1994.tb00176.x
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    Cited by:

    1. King, Tao-Hsien Dolly & Mauer, David C., 2014. "Determinants of corporate call policy for convertible bonds," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 112-134.
    2. Nicoleta Bărbuță-Mișu & Mara Madaleno & Vasile Ilie, 2019. "Analysis of Risk Factors Affecting Firms’ Financial Performance—Support for Managerial Decision-Making," Sustainability, MDPI, vol. 11(18), pages 1-19, September.

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