Disappearing Call Delay and Dividend-Protected Convertible Bonds

Abstract

Firms have not historically called their convertible bonds as soon as conversion could be forced. A number of explanations for the delay rely on the size of the dividends that bondholders forgo so long as they do not convert. We investigate an important change in convertible security design, namely that recent convertible bond issues are dividend-protected. Dividend protection means that the conversion value of the convertible bond is unaffected by dividend payments and dividend-related rationales for call delay become moot. We document that call delay is near zero for dividend-protected convertible bonds.

The appendices for this paper are available at the following URL: http://ssrn.com/abstract=2579127

Keywords: call policy, dividend protection, convertible securities, security design

JEL Classification: G2, G32