Free until: 26 July 2018
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.