IRGA 2021 F2I

The current health crisis has highlighted more than ever the need to develop appropriate financial instruments so that businesses can finance their investments during times of crisis. Support plans, exceptional measures, and other aid programs implemented by the national government and regional authorities are of major importance, but financial innovation must play an equally fundamental role in supporting the economy. In particular, we are currently seeing record levels of fundraising through innovative and complex “hybrid” financial instruments, with convertible bonds leading the way. While these securities were already used extensively in rescue plans during the previous financial crisis in 2008, the health crisis caused by COVID-19 has seen the issuance of such securities accelerate to record levels and take on new forms, such as the issuance of “green” convertible bonds.

This project is justified for two reasons. From a conceptual standpoint, we observe that current theories are inadequate because the “innovative” aspect of convertible bonds—that is, their optional component—is not adequately highlighted. In the current literature, these securities are viewed simplistically as a sort of “compromise” between traditional financing methods. We will propose theoretical models in which the optional component plays a fundamental role in justifying these securities as a relevant financing method for firms. From an empirical perspective, we aim to understand why this type of financing is so rarely used by small and medium-sized enterprises in the European market—and particularly in France—even though it is widely used by such firms in the U.S. market. It should also be noted that the link between this type of financial innovation and corporate social responsibility has never been studied from an academic perspective, neither in Europe, nor in the United States, nor in other markets.

The objective of this project is to explore, from both a conceptual and empirical perspective, corporate financing decisions involving convertible bonds in a context of high uncertainty, such as that caused by the current health crisis. By understanding the role played by these financing methods, executives and investors will gain a better understanding of their benefits, which will help strengthen investment in projects that create value for both businesses and society.  

The expected contributions of this project are primarily academic but also managerial. From an academic perspective, we will highlight the shortcomings of current theories in this field and propose relevant models in which innovation—at the heart of the financing arrangements under study—plays a fundamental role in resolving the financial problems faced by companies. From a managerial perspective, the results of our studies could be useful in both corporate finance and market finance. In corporate finance, the use of convertible bonds could be particularly beneficial to startups, which by their very nature undertake risky projects that are heavily affected by information asymmetries between managers and investors. In market finance, our studies could be useful to fund managers investing in securities with an optional component (two-thirds of the market capitalization of convertible bonds is held by fund managers, often “hedge funds”).