Convertible Bonds Redemption Terms Of Design Of Empirical Research

Issuing debt securities is the most popular way of financing for the company in Taiwan. In particular, deregulation of financial environment makes euro convertible bonds play an impressive role in the capital market. Since 1998, the volumes of bond funds have exceeded those of stock funds. In order to enhance returns and reduce risks, bond fund managers try to enrich their portfolio by keeping convertible bonds. Furthermore, large shareholders can arbitrage and have firms' ownership by holding domestic or euro convertible bonds. Therefore, convertible bonds provide upside participation with downside protection. Most convertible bonds are issued with a callability provision. Call risk is so pervasive in fixed income portfolio management that many market participants consider it second only to interest-rate risk in importance. The author analysis focuses on this important feature of security design involving convertible bonds. An uncertain investment timing dimension may provide a logical link to the strength or length of call protection.The author takes the whole universe of convertible bonds issued between 1989 to 1998 and truncates the sample in 1996 so that the author may observe 5-year capital expenditure data following issuance. Exchangeable bonds, that is, those that are convertible into the shares of a firm other than the issuer, are omitted to allow the author to link capital expenditures of issuers with their respective call provisions. Also, the author rejects issues for which capital expenditures are unavailable from Taiwan Economic Journal database. After eliminating financial institutions, our sample consists of 146 convertible bond issues. Based on Mayers' sequential financing hypothesis, the author's research utilizes the methodology of Korkeamaki and Moore and sets up two models to examine the relations between call provision and capital investment activities.The author wants to complement the evidence cited by Mayers to support his sequential financing motive. Mayers' model features an uncertain investment timing dimension that provides a logical link to the strength of call protection. The key measure, denoted as TIMING, is the number of years following issuance in which cumulative annual expenditures first meet or exceed proceeds from convertible issuance. Of our 146 firms, 37 had expenditures in the first year following issuance that exceeded their respective amounts raised. In the second year following issuance, cumulative expenditures of 45 firms exceeded the amounts raised, 21 in the third year, 6 in the fourth year, and 37 in the end of the fifth year. Firms with relatively low (high) values of TIMING are predicted to issue convertibles with weaker (stronger) call protection.The author analysis focuses call provisions including the strength and length of call protection. On the one hand, the call protection can be in various forms. Theauthor categorizes each of the 146 issues as (1) no protection, (2) soft protection, (3) hard protection, or (4) absolute protection. The first category (no protection) represents issues that are callable anytime, whereas the second group (soft call protection) has call provisions contingent on stock price behavior. For example, an issue that may be called if the stock price exceeds a specified level by 150 percent of 20 consecutive trading days is categorized as soft protection. The third category (hard protection) features unconditional call protection that takes effect following a period of hard protection. The fourth group includes convertibles that are not callable.On the other hand, the call-protection period is the number of years of call protection specified in each contract. The call-protection periods of those issues with no protection are equal to zero. The period of hard call protection is a specified number of years in the early life of the convertible bond during which the issuer may not call the debt. The call-protection periods of those issues with absolute protection are equal to the bond's maturity.In order to analyze the relations between call provision and capital investment activities, the author employs both logistic regression and Poisson regression analysis to get through it. The first part of this research is done by employing logistic regression analysis to examine the relations between call protection strength and capital expenditure. There are 5 models within the first part. In the first reduced model, the author suppresses all issue-specific variables except for PROCEEDS as a size control; that is, the author drops EURO and MATURE. In the second reduced model, the author omits market variable BF96. In the third reduced model, the author drops all variables except the investment timing variable (TIMING) and the size control. In the fourth reduced model, the author restricts the model to the investment timing variable only. In the saturated (full) model and the first reduced models, since the investment timing variable is negative and significant, we conclude that firms issuing convertible bonds with strong (weak) call protection experience higher (lower) levels of capital investment shortly after issuance.The second part of this research is done by employing Poisson regression analysis to examine the relations between call protection period and capital expenditure. Similarly, there are 5 models within the second part. In all cases, the investment timing variable is negative and significant, and thus firms with capital expenditures distributed over longer periods following convertible issuance feature longer periods of call protection.Interestingly, the author's empirical evidence is totally different from that of Korkeamaki and Moore's work. They find that issues with weak or no call protection are offered by U.S. firms, which invest greater amounts soon after issuance than those invested by others issuing convertibles with strong protection. Moreover, capital...