Abstract

Publicly listed companies have a wide range of possibilities when they seek new sources of financing. When doing so, they face a fundamental decision, namely what type of security to issue among a variety of securities including equity, debt, and hybrid securities such as convertible bonds, and warrants, etc. This study examines what drives US firms during the period of 1997-2007 to choose among convertible debt, debt, and equity based on their firm characteristics and macro-economic conditions through both binary and multi-nominal logistic regressions. My results suggest that, first; there are significant differences in the characteristics of debt-like and equity-like convertible security issuers. These differences are particularly apparent in the following characteristics which, from the perspective of debt-like security issuers, tend to be as follows: tax Shields (higher), profitability (higher), firm size (larger) and firm age (older). Second, the issuers of debt-like convertibles tend to differ significantly from straight debt issuers in the following dimensions: leverage (higher), firm risk (higher), profitability (higher), growth opportunities (fewer), issue amounts (smaller), pre-announcement performance (better), industry (more high-tech firms), and higher issuing activity when the economic environment reflects a high financing cost for both debt and equity. Third, equity-like convertible issuers tend to differ from equity issuers in the following dimensions: firm size (larger), industry (more non-tech firms), profitability (lower) and pre-announcement stock performance (worse). Similar differences can be found when I consider models in which I examine all three security choices at the same time. Lastly, in a separate investigation, I find that high-tech firms and non-tech firms demonstrate considerable differences with respect to the determinants of their security issue choice. These findings provide strong support for Green's (1984) sweetened debt hypothesis and partial support for Stein (1992) delayed equity hypothesis.