Convertible bonds financing : Shareholder wealth effects, Sequential Investments and Call Policies.

Summary This thesis sheds light on various aspects of convertible bond financing in the Western European market between 1994 and 2016. The first study analyzes the market reaction to the announcement of convertible bonds during crisis periods. Our results show a significantly more negative reaction during crisis periods than during normal periods. The study of the determinants of this reaction indicates that investors recognize the potential of convertible bonds to reduce external financing costs. However, the negative market reaction is at least partly due to the suspicion of a possible overvaluation of the issuer and this suspicion is exacerbated in times of financial crisis. Furthermore, we show that part of the negative reaction to the convertible announcement is probably due to short selling by arbitrageurs. The second study of this thesis tests Mayers' (1998) theory of sequential financing, which predicts that the use of convertible bonds allows for the optimal financing of sequential investments. We assess the importance of the call issuer in the optimal implementation of sequential financing by comparing the financing and investment activities of firms that called their convertible bonds early to those of firms in the same industry that redeemed them normally at maturity. Our results indicate that the early call provision allows issuers to minimize issuance costs and signals a sequential financing strategy in its "strong" form. Furthermore, the double-difference model indicates that firms that call their convertibles early invest more than firms that redeem them normally on the call dates, controlling for time effects and other control variables. The last chapter of this thesis deals with the prepayment policy of convertible bonds. We show, as in previous studies, that firms delay the recall of their convertibles relative to the optimal recall point advocated by Ingersoll (1977). The analysis of the different theories justifying the late recall of convertible bonds leads to results consistent with the financial distress hypothesis but rejects those related to the existence of the notification period.