Determinants of Convertible Bond Structure;

Theoretical research argues that convertible bonds mitigate the contracting costs of moral hazard, adverseselection, and financial distress. Using firm-specific and macroeconomic factors of the contracting costs,we examine the extent to which they impact the likelihood of issuance and the structure of convertiblebonds. Our evidence indicates that moral hazard, adverse selection, and expected financial distress costsare all important determinants of the likelihood of issuing convertible bonds over straight bonds. We alsoanalyze the structure of convertible bonds issued by studying whether these bonds are more debt-like orequity-like. The evidence indicates that moral hazard costs do not influence bond structure, while adverseselection costs are somewhat important in determining the structure. Expected financial distress costshave the strongest statistical and economic impact on convertible bond structure.