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A Sequential Signaling Model Of Convertible Debt Issue And Call Policies

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  • Yul W. Lee

Abstract

This paper offers a new explanation for why some risk‐averse firms may prefer to issue callable convertible debt. Here, the convertible debt issue and call policies are integrated into a unified financing policy. It is then shown that for firms with relatively low unsystematic risk, convertible debt issuance followed by an appropriate in‐the‐money signaling 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 to explain the stock price behavior at announcements of convertible debt sales.

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  • Yul W. Lee, 2000. "A Sequential Signaling Model Of Convertible Debt Issue And Call Policies," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(1), pages 45-76, March.
    • Handle: RePEc:bla:jfnres:v:23:y:2000:i:1:p:45-76
    DOI: 10.1111/j.1475-6803.2000.tb00810.x
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