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The Consequences of Issuing Convertible Bonds: Dilution and/or Financial Restructuring?

de La Bruslerie, Hubert; Gillet, Roland (2010), The Consequences of Issuing Convertible Bonds: Dilution and/or Financial Restructuring?, European Financial Management, 16, 4, p. 552-584. http://dx.doi.org/10.1111/j.1468-036X.2008.00464.x

Type
Article accepté pour publication ou publié
Date
2010-09
Journal name
European Financial Management
Volume
16
Number
4
Publisher
Wiley-Blackwell
Pages
552-584
Publication identifier
http://dx.doi.org/10.1111/j.1468-036X.2008.00464.x
Metadata
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Author(s)
de La Bruslerie, Hubert
Gillet, Roland
Abstract (EN)
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 nondilutive 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.
Subjects / Keywords
convertible bonds; debt leverage; corporate financing decision; stock market efficiency; event studies
JEL
G14 - Information and Market Efficiency; Event Studies; Insider Trading
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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