Essays on the use of convertible bonds and the security issuance decision

This dissertation examines two topics, the use of convertible bonds by Canadian companies and the security issuance choice in the Canadian market. The first part of the dissertation is devoted to the use of convertible debt by Canadian companies. Practitioners most often view convertibles as delayed equity and claim to issue them because of the lower coupon rate and to “sweeten” the debt issue, which would be otherwise more difficult to place. On the other hand, academics have proposed theories that in general suggest that companies that face high debt- and/or equity-related agency costs could benefit from issuing convertible debt as opposed to other “straight” means of financing. Chapter 2 provides the literature overview of the motives for the issuance of convertible debt. Chapter 3 investigates motives for the use of convertible debt in the Canadian market. Chapter 6 analyzes a convertible arbitrage in the Canadian market, a strategy mainly used by hedge funds to exploit underpricing of convertible bonds. The second part of the dissertation analyzes the security issuance decision in the Canadian market. The security issuance decision is essentially a capital structure decision. Different explanations have been put forward in the past as to how and when managers decide to increase or decrease the leverage of the firm, such are the pecking-order model, the market timing model and the agreement between insiders and outsiders. Chapter 4 examines the determinants of security issuance choice in the Canadian market, while Chapter 5 investigates the relationship between short interest and some of the capital structure theories.