Western European choices in the convertible debt market: A study on the likelihood and structure of issuing convertible debt

The implications of contracting costs arising from moral hazard, adverse selection and financial distress can be mitigated by the issuance of convertibles. This has shown to influence both security choice and security design decisions. Using binary logistic-based regression models, this thesis investigates the decisions to issue convertible debt and its associated design. It is shown that as adverse selection and financial distress costs rise, firms issue more convertibles over straight debt. These convertibles however are only structured to be more debt-like as adverse selection costs have the only real significant impact on the design. The factors influencing these decisions are firm-specific where firm size, leverage and stock volatility are the main deciding factors. It too has been demonstrated that the little to non-existent influence of macroeconomic variables over this time frame may be attributable to the unique economic environment over the past decade, characterized by low to negative interest rates and steady economic growth.