The Motivations of Issuing Convertible Bonds - An Inquiry regarding the Sequential-Financing Hypothesis

The aim of this paper is to re-examine the sequential-financing hypothesis in the context of convertible bond issuances from firms listed on the Taiwan Stock Exchange from 1994 to 2003. The results contend that announcements of convertible debt offerings are, on average, associated with significantly negative abnormal returns. In addition, the pre-announcement volatility of stock returns is not significantly different from the post-announcement volatility. The results also indicate that two characteristics of firms in this sample are consistent with the sequential-financing hypothesis, but they are also consistent with mitigation of the informational asymmetry problem. Overall, our evidence shows mixed support for the sequential-financing hypothesis in explaining the motivation of convertible debt financing used by Taiwanese firms.