Is convertible debt a substitute for straight debt or for common equity

Is convertible debt a substitute for straight debt or for common equity (1999)

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by Craig M. Lewis , Richard J. Rogalski , James K. Seward , The Thank Kooyul Jung , Yong-cheol Kim

Venue:	Financial Management
Citations:	10 - 1 self

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Datum	Value	Source
TITLE	Is convertible debt a substitute for straight debt or for common equity	INFERENCE
AUTHOR NAME	Craig M. Lewis	SVM HeaderParse 0.2
AUTHOR AFFIL	Owen Graduate School of Management; Vanderbilt University	SVM HeaderParse 0.2
AUTHOR ADDR	Nashville, TN 37203	SVM HeaderParse 0.2
AUTHOR NAME	Richard J. Rogalski	SVM HeaderParse 0.2
AUTHOR AFFIL	Amos Tuck School of Business; Dartmouth College	SVM HeaderParse 0.2
AUTHOR ADDR	Hanover, NH 03755	SVM HeaderParse 0.2
AUTHOR NAME	James K. Seward	SVM HeaderParse 0.2
AUTHOR AFFIL	Graduate School of Business; University of Wisconsin-Madison	SVM HeaderParse 0.2
AUTHOR ADDR	Madison, WI 53706	SVM HeaderParse 0.2
AUTHOR NAME	The Thank Kooyul Jung	SVM HeaderParse 0.2
AUTHOR NAME	Yong-cheol Kim	SVM HeaderParse 0.2
ABSTRACT	This paper examines the ability of the risk-shifting hypothesis and the backdoor equity hypothesis to explain firms ’ decisions to issue convertible debt. Using a security choice model that incorporates pre-offer issue, issuer, and macroeconomic information, we document significant variation in the market reaction to new convertible debt issues depending on whether investors expect the motivation for issuance to be asset substitution or asymmetric information. Our results suggest that both motives explain the use and design of convertible debt. Some firms issue convertible debt instead of straight debt to mitigate the costs of bondholder/stockholder agency conflicts. Other issuers use convertible debt instead of common equity to reduce the costs of adverse selection. Thus, in contrast to standard securities like straight debt or common equity, which solve some financing problems but exacerbate others, hybrid securities such as convertible debt are seen as providing a more flexible funding choice that can solve conflicting financing problems. Financial economists study the security issue decision to understand more fully why firms choose to issue a particular security and how investors in financial markets react to that choice. The research documents several results about investor reaction to the announcement of	SVM HeaderParse 0.2
YEAR	1999	SVM HeaderParse 0.2
VENUE	Financial Management	INFERENCE
VENUE TYPE	JOURNAL	INFERENCE
PAGES	5--27	INFERENCE
CITATIONS	34 found	ParsCit 1.0