Business, Management and Accounting
4 years ago

Convertible debt issuance reduces equity risk more effectively than traditional financing.

SSRN Electronic Journal
A Sequential Signalling Model of Convertible Debt Issue and Call Policies
Yul W. Lee

Paper Summary

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This paper explains why some cautious companies may choose to issue callable convertible debt. By combining convertible debt issuance with a specific call policy, firms can reduce their equity risk more effectively than with other financing options. The model also considers how asymmetric information affects stock prices when convertible debt is announced. Overall, the research suggests that convertible debt issuance followed by a certain call policy can help firms manage their risk better than other types of financing.