An empirical analysis of the choice among issuing straight debt, equity, and equity-linked debt securities

This dissertation analyzes factors associated with the apparent decision that firms make when choosing a source of long-term capital. Straight debt, common stock, convertible debt, and units of debt with warrants (units) are included in the issuer’s opportunity set, with particular emphasis being placed on the choice between convertible debt and units. A unit of debt with warrants is a financial package consisting of a straight bond or note, and one or more common stock warrants. This study finds that issuers earn insignificant average abnormal returns around the announcement and issuance period for unit offerings, thus presenting units as a unique case of a "penalty-free" equity offering. Finnerty [1986] suggests that units may be structured in such a way as to create a synthetic convertible bond. He shows how a unit provides the issuer an advantage of a larger tax shield than does a comparatively structured convertible. The present study finds that the market views the tax advantage as being only marginally important. Also, a comparison of the terms of units and convertibles reveals that, in practice, units are not structured as synthetic convertible bonds. A cross—sectional analysis evaluates unit and convertible issuer abnormal returns in light of hypotheses that the securities reduce agency costs to the firm. The evidence is generally inconsistent with the agency cost reduction hypothesis. This study presents the first information about the valuation consequences of unit issuances and factors that may be related to the decision to make such offerings.

Name thesis:degree_name

Ph. D.

Level thesis:degree_level

doctoral

Discipline thesis:degree_discipline

Finance

Department dc:contributor.department

Finance

Grantor dc:publisher

Virginia Polytechnic Institute and State University

Year dc:date.issued

1989

Author dc:creator

• Smith, David M.

Chair dc:contributor.committeechair

• Billingsley, Randall S.

Committee members dc:contributor.committeemember

• Chance, Donald M.
• Ferris, Stephen P.
• Lamy, Robert E.
• Thompson, G. Rodney

Statement dc:rights

• In Copyright

Licence dc:rights.uri

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

Language dc:language.iso

en_US

Handle dc:identifier.uri

http://hdl.handle.net/10919/54431

OAI identifier oai:identifier

oai:vtechworks.lib.vt.edu:10919/54431