A Sequential Signalling Model of Convertible Debt Issue and Call Policies

Posted: 29 Sep 1999

See all articles by Yul W. Lee

Yul W. Lee

University of Rhode Island - College of Business Administration

Abstract

This paper offers a new explanation for why some risk-averse firms may prefer to issue callable convertible debt. In this paper, the convertible debt issue and call policies are integrated into a unified financing policy. It is then shown that convertible debt issuance followed by the in-the-money signalling call policy reduces more unsystematic equity risk than equity, callable straight debt, or their combination. The model is modified to incorporate asymmetric information at the issue stage in order to explain the stock price behavior at announcements of convertible debt sales. Finally, the paper discusses some unique empirical implications of the model regarding the firm's motivation for convertible debt issue.

JEL Classification: G32

Suggested Citation

Lee, Yul W., A Sequential Signalling Model of Convertible Debt Issue and Call Policies. Available at SSRN: https://ssrn.com/abstract=170408

Yul W. Lee (Contact Author)

University of Rhode Island - College of Business Administration ( email )

Kingston, RI 02881
United States

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