Do Hybrid Instruments Lower the Firm Cost of Capital?

5 Pages Posted: 15 May 2006

See all articles by Guy Ford

Guy Ford

Macquarie University - Graduate School of Management

Tyrone M. Carlin

Southern Cross University; The University of Sydney Business School

Nigel Finch

Saki Partners

Date Written: 2006

Abstract

The issue of hybrid instruments by firms is often justified on the grounds that these instruments allow issuers to achieve a lower cost of capital than would be the case under issues of straight debt and equity. In order to assess the validity of such claims it is necessary to examine the economic impact of hybrid instruments on the issuing company. If a firm can genuinely achieve a lower cost of capital than would otherwise be the case with the issue of either straight debt or equity, we argue that this is directly linked to regulatory (reporting) arbitrage, rather than the outcome of financial synergy that arises when debt, equity and option instruments are combined to form a hybrid security. We evaluate the argument that hybrid structures lower the cost of capital from an opportunity cost and risk perspective. We focus our analysis on two main structures: convertible debt and reset preference shares.

Keywords: hybrid securities, cost of capital, regulatory arbitrage

JEL Classification: G20, G30, M40

Suggested Citation

Ford, Guy and Carlin, Tyrone M. and Finch, Nigel, Do Hybrid Instruments Lower the Firm Cost of Capital? (2006). Available at SSRN: https://ssrn.com/abstract=902202 or http://dx.doi.org/10.2139/ssrn.902202

Guy Ford

Macquarie University - Graduate School of Management ( email )

99 Talavera Road
Sydney, NSW 2113
Australia
+61-2-9850-7813 (Phone)
+61-2-9850-9019 (Fax)

Tyrone M. Carlin

Southern Cross University ( email )

Lismore, New South Wales 2480
Australia

The University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia
+ 61 2 9036 7230 (Phone)
+61 2 9351 7471 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/tyronec

Nigel Finch (Contact Author)

Saki Partners ( email )

Australia

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