Why Firms Use Convertibles-The Correlatively Theoretical And Empirical Analysis About The Sequential-financing Hypothesis

Convertible bond has been widely used as a financing tool in developed country over a century. Great changes about global convertible market have taken place in extent and depth, which is mature and flourish increasingly .Especially in recent years, the advantage of convertibles popped up, because global stock market shocked resulting from the bubble crash of web stock. The convertible market made record in capital scale and issue volume world widely since the rate in many countries went down continuously and the financing costs of convertibles declined sharply. However, why firms use convertibles still remain unresolved.At first, this paper conclude that the classic explanation for why firms use convertibles is risk-shifting, risk estimation,"back door"equity financing and sequential financing hypothesis after the analysis of overseas literatures .Mayer's sequential financing hypothesis becomes the point of this paper since it emphasizes on phase of project among these representative theories.Then, this paper make an introduction of these theories in detail, especially the theory of"back door"equity financing advanced by Stein and sequential financing hypothesis advanced by Mayer. During the process of analysis of sequential financing hypothesis, this paper make use of some hypothesis in Stein's model, and draw the conclusion that there exists separate equilibrium among the three types of firms with game theory. Because Mayer did not submit the direct evidence about his hypothesis, this paper will give empirical analysis for the sequential financing hypothesis.A deduction can be got from analysis of the sequential financing hypothesis that the maturity of convertibles should equate the period of project. When this paper make test of the deduction, there is significant difference between the maturity of convertibles and the period of project. Besides, a reasonable explanation for it is presented. The broad sense of the sequential financing hypothesis is: there are two independent projects, one of which is in money. At the end of the project, investment option is existed. But the investment option is uncertain at the beginning, only come out at the end of the project. At the same time, the firm obtains the payoff from the project. If the sequential project is valuable, the investor will transfer there convertibles into stocks and the fund is left in the firm for financing of the sequential project and the issue costs is reduced. If the sequential project is worthless, the investor will not transfer, and the overinvestment can be controlled since the unwanted money is given back to investors. This paper gives the explanation that when the sequential financing hypothesis is applied to the reason of issuing of convertibles, and when the broad sequential financing hypothesis is applied to the reason of issuing of convertibles.At last, this paper presents some suggestions at the angle of issuer and inspector.