Abstract

We examine the influence of institutional investors on the issuance of convertible bonds using a sample of convertible bonds offered between 1995 and 2014 in the US market. We use delta of the convertible bond, the sensitivity of convertible bond value to the underlying stock price, to categorize the convertible bonds into equity-like or debt-like. Based on an extended pecking order theory of Myers and Majluf (1984), equity-like convertible bonds are issued by firms that suffer less information asymmetry problems and debt-like convertible bonds are issued by firms that suffer less agency cost problems. We find that institutional ownership is positively related with delta. A detailed analysis of testing the relation of different horizons of institutions on delta reveals that dedicated and transient institutions are positively related to delta and are effective in mitigating the asymmetric information problem. Quasi-indexer institutions, on the other hand, have more impact on alleviating the agency cost problem. Institutions with investment style of growth also are positively related with delta, while value-oriented institutions are negatively related with delta, a lower probability of conversion into equity. The results are consistent with the common view that firms with more growth potential tend to issue more equity-like convertible bonds to mitigate the underinvestment problem and avoid the debt overhang problem (Myers, 1977). We also document that stockholders’ reactions to convertible debt announcements are more negative with a higher institutional investor participation.