Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible debt windows. Importantly, this result holds while controlling for equity and straight debt issuance volumes and for macroeconomic conditions. In addition, stockholders are less sensitive to issuer- and issue-specific financing costs during hot convertible debt markets. Overall, these findings indicate that hot convertible debt markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible debt offering during a hot market.     

Analyst Coverage and Financing Decisions

We provide evidence that analyst coverage affects security issuance. First, firms covered by fewer analysts are less likely to issue equity as opposed to debt. They issue equity less frequently, but when they do so, it is in larger amounts. Moreover, these firms depend more on favorable market conditions for their equity issuance decisions. Finally, debt ratios of less covered firms are more affected by Baker and Wurgler's (2002) “external finance‐weighted” average market‐to‐book ratio. These results are consistent with market timing behavior associated with information asymmetry, as well as behavior implied by dynamic adverse selection models of equity issuance.     

How Persistent Is the Impact of Market Timing on Capital Structure?

This paper examines the capital structure implications of market timing. I isolate timing attempts in a single major financing event, the initial public offering, by identifying market timers as firms that go public in hot issue markets. I find that hot‐market IPO firms issue substantially more equity, and lower their leverage ratios by more, than cold‐market firms do. However, immediately after going public, hot‐market firms increase their leverage ratios by issuing more debt and less equity relative to cold‐market firms. At the end of the second year following the IPO, the impact of market timing on leverage completely vanishes.     

International Cross‐Listings and Subsequent Security‐Market Choices: Evidence from ADRs

We study the link between the attributes of American depositary receipt (ADR)‐listed firms and their post‐listing security‐market choices. We find that developed market firms are more likely to issue equity and debt than their emerging market counterparts. Furthermore, we find that large firms are more likely to issue debt and less likely to issue equity. When we examine locations where ADR firms raise their capital, we find that firms originating from countries where the protection of minority shareholders is weak are more likely to issue debt on their home markets and less likely to issue debt on international markets (excluding U.S. markets). Furthermore, ADR firms originating from developed (emerging market) countries are more (less) likely to issue their equity on their domestic markets and less (more) likely to issue equity on international markets (excluding U.S. markets).     

DOES FINANCIAL FLEXIBILITY REDUCE INVESTMENT DISTORTIONS?

The average U.S. firm has less leverage than one would expect based on the trade‐off between tax shields and bankruptcy costs. We focus on firms’ financial flexibility and examine whether firms preserve debt capacity to reduce investment distortions in the future. We find that firms with high unused debt capacity invest more in future years than do firms with low unused debt capacity. Furthermore, firms that are reluctant to borrow in unconstrained periods are more likely to issue debt in periods in which access to capital markets is more constrained.     

Equity and debt issuance by firms violating GAAP

We examine security issuance in restated periods by firms that misreport financial statements and find that only a small per cent of such firms issues securities in the restated period. Investors are misled by mistakes made by firms issuing equity more so than other restating firms at the initial announcement of misreported earnings, but are not misled by mistakes made by debt‐issuing firms. Equity‐issuing firms that manage earnings to beat analyst expectations experience abnormally high returns in the restated period prior to security issuance. Firms that restated more reports and have higher pre‐mistake returns are more likely to issue equity. High leverage, firm size and number of restated periods are positively associated with the likelihood of debt issuance by restating firms.     

Conglomerate Structure and Capital Market Timing

We examine the effects of keiretsu structure on capital market-timing. Keiretsu groups offer a hybrid structure between fully integrated conglomerates and stand-alone firms. We find that past market conditions affect the capital structure of keiretsu firms more than they affect the capital structure of unaffiliated firms. The decision to issue equity is more correlated with market conditions for keiretsu members than it is for unaffiliated firms. The stock returns of keiretsu firms following the issuance of equity decrease with the size of the issuance. These results suggest that keiretsu members time the issuance of equity more so than stand-alone firms.     

Why Do Firms Issue Equity?

We develop and test a new theory of security issuance that is consistent with the puzzling stylized fact that firms issue equity when their stock prices are high. The theory also generates new predictions. Our theory predicts that managers use equity to finance projects when they believe that investors' views about project payoffs are likely to be aligned with theirs, thus maximizing the likelihood of agreement with investors. Otherwise, they use debt. We find strong empirical support for our theory and document its incremental explanatory power over other security‐issuance theories such as market timing and time‐varying adverse selection.     

Short‐Term Debt as Bridge Financing: Evidence from the Commercial Paper Market

We analyze why firms use nonintermediated short‐term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start‐up financing for capital investment. Firms’ CP issuance is driven by a desire to minimize transaction costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. Further, CP is often refinanced with long‐term bond issuance to reduce rollover risk.     

The Determinants of Debt Maturity Structure: Evidence from France,Germany and the UK

We examine the determinants of the debt maturity structure of French, German and British firms. These countries represent different financial and legal traditions that may have implications on corporate debt maturity structure. Our model incorporates the factors representing three major theories (tax considerations, liquidity and signalling, and contracting costs) of debt maturity. It also controls for capital market conditions. The results confirm the applicability of most theories of debt maturity structure for the UK firms. However, the evidence from France and Germany are mixed. Overall the findings suggest that the debt maturity structure of a firm is determined by firm‐specific factors and the country's financial systems and institutional traditions in which it operates.     

Firm growth type and capital structure persistence

We find that growth type (identified by a two-way sort on firm initial market-to-book ratio and asset tangibility) can parsimoniously predict significantly dispersed and persistently distinct future leverage ratios. Growth type is persistent; growth-type-sorted cross-sections of corporate fundamental variables (such as tangible versus intangible investment style) are also meaningfully persistent. As economic and market conditions improve, low growth type firms are keener to issue new debt than equity, whereas high growth type firms are least likely to issue debt and keenest to issue equity. These findings demonstrate that firms rationally invest and seek financing in a manner compatible with their growth types. Consistent with a generalized Myers–Majluf framework, growth type compatibility enables distinct growth types and hence specifications of market imperfection or informational environments to persist. Growth type is apparently a fundamental factor for capital structure persistence.     

Access to capital,investment, and the financial crisis

During the recent financial crisis, corporate borrowing and capital expenditures fall sharply. Most existing research links the two phenomena by arguing that a shock to bank lending (or, more generally, to the corporate credit supply) caused a reduction in capital expenditures. The economic significance of this causal link is tenuous, as we find that (1) bank-dependent firms do not decrease capital expenditures more than matching firms in the first year of the crisis or in the two quarters after Lehman Brother's bankruptcy; (2) firms that are unlevered before the crisis decrease capital expenditures during the crisis as much as matching firms and, proportionately, more than highly levered firms; (3) the decrease in net debt issuance for bank-dependent firms is not greater than for matching firms; (4) the average cumulative decrease in net equity issuance is more than twice the average decrease in net debt issuance from the start of the crisis through March 2009; and (5) bank-dependent firms hoard cash during the crisis compared with unlevered firms.     

Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?

We find that emerging market firms exhibit dividend behavior similar to U.S. firms, in the sense that dividends are explained by profitability, debt, and the market‐to‐book ratio. However, empirical dividend policy equations are structurally different, indicating different sensitivities to these variables. Additionally, emerging market firms seem to be more affected by asset mix, which seems to be due to their greater reliance on bank debt. Overall, country factors are as important in dividend policies as previous studies find them to be in capital structure decisions.     

The determinants of debt maturity in Australian firms

We examine the determinants of debt maturity in the Australian capital market with the Top 400 firms listed on the Australian Securities Exchange for the period 1989–2006. We find that Australian firms not only exhibit a positive leverage–maturity relationship but also use short‐term debt to signal their high quality to the market. Our results are robust to different estimation methods that control for endogeneity and error‐dependence. We also find that ignoring the interaction between leverage and maturity can lead to erroneous conclusions about the support for the matching principle, the agency costs hypothesis and the transaction costs hypothesis.     

SIMULTANEOUS DEBT AND EQUITY ISSUES AND CAPITAL STRUCTURE TARGETS

Numerous empirical studies find evidence that managers behave as if they pursue target debt ratios. A possible alternative to the use of conventional, separate issuances of debt and equity to effect desired adjustments toward a target ratio is the simultaneous issuance of such securities. We extend prior research on such issues by exploring their use in the pursuit of capital structure targets. We find that the issuance of securities in general and the use of simultaneous issues of debt and equity in particular are at least partially influenced by where a firm's capital structure is relative to the average position in its industry. Further, shareholders' reactions to the announced plan to issue and to the issuance of securities are influenced, in part, by whether the issue moves the firm toward or away from the average capital structure in the industry. We also find evidence that the infrequent use of simultaneous issues relative to unaccompanied debt and equity issues is explained by their comparative flotation costs.     

Interest rate changes and the timing of debt issues

There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970–2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.     

Disproportional control rights and debt maturity

Using a hand-collected sample of U.S. dual-class firms, we find that corporate debt maturity increases in insiders' disproportional control rights, which is robust to several robustness tests. This relation is more pronounced among firms more vulnerable to control disruption. Besides, firms with greater disproportional control rights issue more long-term new debt. Further analysis of the stock market reaction to new debt issuance shows that controlling insiders' preference for long-term debt benefits outside shareholders. Overall, our findings suggest that the benefits of minimizing control disruption surpass the costs of long-term debt in insider-controlled firms.     

Earnings Management Surrounding New Debt Issues

We examine whether firms manage earnings before issuing bonds to achieve a lower cost of borrowing. We find significant income‐increasing earnings management prior to bond offerings. We also find that firms that manage earnings upward issue debt at a lower cost, after controlling for various bond issuer and issue characteristics. Our results are consistent with studies that report earnings management around equity issuance. The results indicate that, like equity holders, bondholders fail to see through the inflated earnings numbers in pricing new debt.     

UNITS OF DEBT WITH WARRANTS: EVIDENCE OF THE “PENALTY-FREE” ISSUANCE OF AN EQUITY-LIKE SECURITY

While units of debt with warrants are not structured as perfect substitutes for convertible bonds, there is reason to believe that firms view the two securities as viable alternative methods of raising funds. Analyses of the capital market effects of the announcement of the plan to issue and the issuance of units of debt with warrants provide unique evidence of the “penalty-free” issuance of an equity-like security. Evidence is found to support the conjecture that units are typically issued by smaller, riskier firms than are convertible bonds. However, there is no evidence that the use of this security is interpreted by the market as a sign of financial distress.