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

Abstract

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.