The Risk-Shifting Motive, Convertible Debt Issue and Call Policies

Posted: 4 Nov 1998

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 firms may prefer to issue convertible debt. In this paper, the convertible debt issue and call decisions are integrated into a unified financing policy. It is then shown that the issuance of convertible debt coupled with the in-the-money signaling call policy reduces more unsystematic equity risk than callable straight debt (or rollover of short term debt) or equity financing. The paper proceeds to discuss the empirical implications of the model about the stock price behavior at announcements of convertible issues and calls. The paper also discusses other unique empirical implications of the model regarding entrepreneurs' (or managers') motivations for issuing convertible debt and corporate convertible call policy.

JEL Classification: G10

Suggested Citation

Lee, Yul W., The Risk-Shifting Motive, Convertible Debt Issue and Call Policies. Available at SSRN: https://ssrn.com/abstract=6464

Yul W. Lee (Contact Author)

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

Kingston, RI 02881
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
761
PlumX Metrics