Agency Problems, Information Asymmetries, and Convertible Debt Security Design

Posted: 29 May 1998

See all articles by Craig M. Lewis

Craig M. Lewis

Vanderbilt University - Finance

Richard J. Rogalski

Dartmouth College - Tuck School of Business

James K. Seward

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Abstract

This paper proposes and implements a security design framework to assess why corporate managers issue convertible debt. We examine three theories that make predictions about the design of convertible debt. Our results suggest that some issuers design convertible debt to mitigate asset substitution problems, while others design it to reduce adverse selection problems. We also find that issuers vary convertible debt security design over the business cycle in response to time-variation in asset substitution and adverse selection problems. Overall, the results indicate that corporate managers actively alter convertible debt security design to mitigate costly external finance problems.

JEL Classification: G32

Suggested Citation

Lewis, Craig M. and Rogalski, Richard J. and Seward, James K., Agency Problems, Information Asymmetries, and Convertible Debt Security Design. Available at SSRN: https://ssrn.com/abstract=93615

Craig M. Lewis (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Richard J. Rogalski

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

James K. Seward

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-2738 (Phone)
608-265-4195 (Fax)

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