An empirical analysis of the choice among issuing straight debt, equity, and equity-linked debt securities

• Main Author: Smith, David M.
• Other Authors: Finance
• Format: Others
• Language: en_US
• Published: Virginia Polytechnic Institute and State University 2015
• Subjects: LD5655.V856 1989.S645; Securities; Debt; Equity; Convertible bonds
• Online Access: http://hdl.handle.net/10919/54431

This dissertation analyzes factors associated with the apparent decision that firms make when choosing a source of long-term capital. Straight debt, common stock, convertible debt, and units of debt with warrants (units) are included in the issuer’s opportunity set, with particular emphasis being placed on the choice between convertible debt and units. A unit of debt with warrants is a financial package consisting of a straight bond or note, and one or more common stock warrants. This study finds that issuers earn insignificant average abnormal returns around the announcement and issuance period for unit offerings, thus presenting units as a unique case of a "penalty-free" equity offering. Finnerty [1986] suggests that units may be structured in such a way as to create a synthetic convertible bond. He shows how a unit provides the issuer an advantage of a larger tax shield than does a comparatively structured convertible. The present study finds that the market views the tax advantage as being only marginally important. Also, a comparison of the terms of units and convertibles reveals that, in practice, units are not structured as synthetic convertible bonds. A cross—sectional analysis evaluates unit and convertible issuer abnormal returns in light of hypotheses that the securities reduce agency costs to the firm. The evidence is generally inconsistent with the agency cost reduction hypothesis. This study presents the first information about the valuation consequences of unit issuances and factors that may be related to the decision to make such offerings. === Ph. D.