Financial Behaviour in a Mandatory Conversion Process: Empirical Evidence from Colombia

Convertible bonds are attractive because they offer alternatives for both issuers and investors. Therefore, several companies have used this financial mechanism to raise capital. Although several studies have been published on this topic, mandatory convertible bonds (MCBs), which are subsets of conv...

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Bibliographic Details
Published inGlobal business review Vol. 22; no. 1; pp. 69 - 84
Main Authors González-Ruiz, Juan David, Acosta-García, Maria Isabel, Villa-García, Ramón
Format Journal Article
LanguageEnglish
Published New Delhi, India SAGE Publications 01.02.2021
SAGE PUBLICATIONS, INC
Subjects
Case studies
Companies
Economic value added
Investors
Stockholders
Value added
Mandatory convertible bonds
EVA
WACC
shareholder value
case study
bondholder
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Summary:Convertible bonds are attractive because they offer alternatives for both issuers and investors. Therefore, several companies have used this financial mechanism to raise capital. Although several studies have been published on this topic, mandatory convertible bonds (MCBs), which are subsets of convertible bonds, and their effect on economic value added (EVA) have not been explored deeply. This study analyses what happens to the EVA before, during and after the issuance when investors are involved as shareholders of a company issuing MCBs. A Colombian company is used as a case study. The results reveal that one of the main reasons behind the change in the EVA is not only the weighted average cost of capital or the invested capital but also the operating profit. The net operating profit after tax (NOPAT) depends on operating profit. Therefore, to generate a positive EVA, the NOPAT margin needs to be higher than the margin of financing costs.
ISSN:0972-1509
0973-0664
DOI:10.1177/0972150920964007