Effects of Law on Corporate Financing Practices - International Evidence from Convertible Bond Issues

Examining call protection terms offered by convertible bond issuers from countries with varying levels of shareholder protection and creditor protection provides an interesting previously unexplored method to observe whether firms adjust the design of their financing contracts depending on the nature of local law. The possibility of a forced conversion instituted by an early call is more threatening to investors in an economy where local laws provide less protection to shareholders. Likewise, in an economy where the legal infrastructure makes creditorship appealing, investors should prefer more debt-like contracts. I hypothesize that convertibles issued by firms from shareholder-friendly countries are more equity-like, and convertibles from creditor-friendly countries are more debt-like, and consequently the level of shareholder protection should be inversely related to call protection strength, and creditor protection should be positively related to it. I find strong evidence supportive of my hypothesis in a sample of 1,480 convertible bonds from 27 countries