Convertible Security Design and Contract Innovation

47 Pages Posted: 14 Dec 2008 Last revised: 23 Nov 2012

See all articles by Craig M. Lewis

Craig M. Lewis

Vanderbilt University - Finance

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

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Date Written: January 14, 2008

Abstract

This paper studies convertible security design for a sample of 814 issuers over the years 2000 through 2007. We examine the determinants of the choice of fixed income claim and the method of payment using a nested logit regression model. We find that firms select security designs that reduce corporate income taxes, minimize refinancing costs, and help mitigate managerial discretion costs. Convertible debt issuers frequently select payment methods that permit them to report higher diluted earnings per share. Some of these firms also adopt simultaneous financial strategies (share repurchase programs and call spread overlays) that inflate reported earnings. Firms that adopt these earnings management strategies are more likely to choose certain investment banks.

Keywords: Convertible security financing, Security design, Net share settlement

JEL Classification: G32, L22

Suggested Citation

Lewis, Craig M. and Verwijmeren, Patrick, Convertible Security Design and Contract Innovation (January 14, 2008). Available at SSRN: https://ssrn.com/abstract=1314065 or http://dx.doi.org/10.2139/ssrn.1314065

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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