Convertible bond issues by financially constrained firms

This research examines the influence of financial constraints on the preferred channelof issuance for convertible bonds, the level of accompanying hedge fund involvement andexplores its potential relation to subsequent firm performance. I provide evidence that payingdividends, having credit ratings and firm’s size and age impacts several facets of convertiblebond issues. Non-dividend paying, non-rated and young and small firms have the propensityto issue convertible bonds privately under SEC rule 144A, implying that investor demandimpacts convertible bond issues by financially constrained firms. Financially constrainedconvertible bond issuers tend to underperform financially unconstrained convertible bondissuers up to one year after issuance. No supporting evidence is found for more hedge fundinvolvement with financially constrained convertible bond issuers. Underlying companyfinancials appear not to influence firm behaviour during convertible bond issues.