Convertible notes: The debt versus equity classification problem

Darren Magennis*, Edward Watts, Sue Wright

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

9 Citations (Scopus)

Abstract

This paper tests the Kim (Journal of Financial and Quantitative Analysis, 25 (2) (1990) 229-243) 'Informative Conversion Ratios' hypothesis. The Kim theory predicts that the conversion price of a convertible note issue will determine whether the issue is similar to debt or similar to equity. A convertible note with a low conversion price is similar to equity under the Kim theory whilst a convertible note with a high conversion price is similar to debt. Expected time to at-the-money was used throughout this paper as an adjusted conversion price. Observation of a strong positive relation between announcement period abnormal returns and expected time to at-the-money for a sample of Australian convertible note issue announcements supports the Kim theory.

Original languageEnglish
Pages (from-to)303-315
Number of pages13
JournalJournal of Multinational Financial Management
Volume8
Issue number2-3
Publication statusPublished - Sep 1998

Keywords

  • Convertible notes
  • Event study
  • G14
  • G32
  • Signalling

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