Callable Convertible Bonds in Sequential Financing: Evidence on the Western European Market

International audience ; The objective of the paper is to test empirically the Mayers (1998) sequential financing hypothesis stating that companies issue callable convertible debt to overcome the problem of overinvestment (Jensen, 1986) that could arise in a sequential investment setting. As a result of this theory we should observe higher investment and financing activities at the exercise call dates especially if it is in the money. Based on a sample of 277 Callable Convertible Bonds issued by non-financial firms in Western Europe between 1994 and 2009, comprising 161 callable convertible bonds being subject to forced conversion (calling subsample) and 116 non-called convertible bonds (non-calling subsample) and using classical and difference-in-differences methodologies, we find evidence only weakly in line with the sequential financing hypothesis of Mayers (1998). For the calling firms, we, in general, do not observe significant positive changes in capital expenditure at call dates that are greater than those of the non-calling firms. We observe a significant difference in new equity issuances only for the comparison between calling and non-calling firms. Unlike Alderson et al. (2006), we find that in the money calling firms increase their investment around the convertible bonds calls more than out of the money calling firms. We also find a positive impact of the call decision on the change of the new debt issuance at the call dates.