Convertible Securities and Heterogeneity of Investor Beliefs

We argue that convertible securities can better attract investors with different beliefs on the firm’s future cash flows compared to straight bond and stock. We find that a firm is more likely to issue convertibles rather than stock and straight bond when investors are more heterogeneous in their beliefs. We also find that the positive impact of heterogeneous beliefs on the likelihood of a convertible issuance is more pronounced when the amount of the security issuance is larger. Overall, our findings provide a novel rationale based on investors’ heterogeneous beliefs for the use of convertibles in corporate external financing decisions.