When do firms issue exchangeable debt?

We show that firms successfully attempt to time exchangeable debt offerings. A firm that issues exchangeable debt gives the bondholders the option to exchange their bonds for shares of the underlying firm in which the issuing firm has a stake. Companies tend to raise cash with exchangeable debt soon after the underlying stock has appreciated, but issuers expect deterioration in the future performance of the underlying firm. The price of the underlying asset falls after the exchangeable debt is issued. An exchangeable debt issue also signals the prospective open market sale of the underlying shares by the issuer.
Introduction Exchangeable debt is bonds issued by one company that are convertible into common shares of a second company (hereafter the underlying firm) in which the issuing firm has a [...]