Critical Finance Review > Vol 7 > Issue 1

Why Do Firms Issue Convertible Bonds?

Ming Dong, Schulich School of Business, York University, Canada, , Marie Dutordoir, Alliance Manchester Business School, UK, , Chris Veld, Monash Business School, Monash University, Australia,
Suggested Citation
Ming Dong, Marie Dutordoir and Chris Veld (2018), "Why Do Firms Issue Convertible Bonds?", Critical Finance Review: Vol. 7: No. 1, pp 111-164.

Publication Date: 10 Jul 2018
© 2018 Ming Dong, Marie Dutordoir, and Chris Veld
Convertible debtInterviewsMarket misvaluationInvestor demandHedge fundsInvestment banks


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In this article:
1. Introduction 
2. Data 
3. Managers’ Spontaneously Cited Issuance Motives 
4. The Drivers of Convertible Issuance: A Security Choice Analysis 
5. The Validity of Convertible Bond Theories 
6. The Influence of Investors and Financial Intermediaries 
7. Conclusion 
Appendix A: Interview Design and Execution 
Appendix B: Measurement of Variables Included in the Security Choice Analysis 


We use in-depth interviews with top corporate executives to examine why companies issue convertible bonds. We find that firms issue convertibles when they perceive these securities to be a cheaper form of financing than straight bonds and equity. A large-sample analysis of security offerings confirms this insight by highlighting feature-adjusted yield spreads as a significant determinant of the choice between convertibles and straight bonds, and equity misvaluation as a significant determinant of the choice between convertibles and equity. Our interviews also allow us to verify individual convertible bond theories. We obtain evidence for the theory that convertible bonds are more suitable than straight debt when management and investors disagree about the riskiness of the firm. However, risk shifting, sequential financing, and backdoor equity theories receive little or no support. Finally, our interviews provide strong evidence for the impact of investor demand and financial intermediaries on convertible bond issuance decisions, two factors under-explored by previous studies.