Two Essays on Convertible Debt

This dissertation examines two different topics related to the issuance of a convertible debt security. The first essay addresses the question of how managers set the equity value in a convertible debt issue. A convertible debt security has value derived from an equity component and a debt component. As a result, managers must decide how much of the convertible debt's value will be derived from equity at issuance. I examine three hypotheses in addressing this question. Empirical evidence is provided supporting the assertion that managers issue more equity-like debt when the firm will have lower future operating performance and a greater potential for underinvestment. Empirical support is not found for managers take into consideration asset substitution concerns when setting the equity value in a convertible debt issue. The second essay examines why are abnormal returns negative for the equity during the convertible debt's issuance period. This has been documented by Dann and Mikkelson (1984), Mikkelson and Partch (1986, 1988), and also by this dissertation. I furnish evidence that is consistent with a bid-ask spread bias not causing the negative equity abnormal returns during the issuance period of a convertible debt security. Tests are also performed that provide results that are consistent with the issue period returns being partially due to a resolution of uncertainty.

Name thesis:degree_name

Ph. D.

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

Accounting and Information Systems

Department dc:contributor.department

Accounting and Information Systems

Grantor dc:publisher

Virginia Tech

Year dc:date.issued

1997

Author dc:creator

• Bremser, Albert W.

Chair dc:contributor.committeechair

• Keown, Arthur J.

Committee members dc:contributor.committeemember

• Billingsley, Randall S.
• Easterwood, John C.
• Kumar, Raman
• Shome, Dilip K.

• security
• convertible debt
• equity

Statement dc:rights

• In Copyright

Licence dc:rights.uri

• http://rightsstatements.org/vocab/InC/1.0/

Dc Identifier Other

etd-192016312971890

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/30327