Advanced Search
MyIDEAS: Login to save this article or follow this journal

The impact of convertible debt financing on investment timing

Contents:

Author Info

  • Yagi, Kyoko
  • Takashima, Ryuta
Registered author(s):

    Abstract

    We develop a model to examine the timing of investment decisions in relation to the issuance of convertible debt by firms. Our model shows that when the demand shock has higher volatility, the firm finances the investment cost with high-coupon convertible debt. We find that default occurs earlier for firms that finance with convertible debt rather than with straight debt. We also find that firms with high-growth prospection, high volatility, and low capital costs that issue convertible debt tend to defer investments. Furthermore, we examine the investment decisions in which the convertible debt includes a call provision. We show that firms that use callable convertible debt invest earlier than those that use non-callable convertible debt by using suboptimal coupon payments. The opportunity from the forced conversion increases as the volatility increases. These results are consistent with recent empirical evidence.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/pii/S0264999312002052
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 29 (2012)
    Issue (Month): 6 ()
    Pages: 2407-2416

    as in new window
    Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2407-2416

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Irreversible investment; Convertible debt; Capital structure; Call provisions; Real options;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    2. John C. Banko & Lei Zhou, 2010. "Callable Bonds Revisited," Financial Management, Financial Management Association International, vol. 39(2), pages 613-641, 06.
    3. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September.
    4. Sarkar, Sudipto, 2003. "Early and late calls of convertible bonds: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 27(7), pages 1349-1374, July.
    5. Akihiko Takahashi & Takao Kobayashi & Naruhisa Nakagawa, 2001. "Pricing Convertible Bonds with Default Risk: A Duffie-Singleton Approach," CIRJE F-Series CIRJE-F-140, CIRJE, Faculty of Economics, University of Tokyo.
    6. Christian Koziol, 2006. "Optimal Debt Service: Straight vs. Convertible Debt," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 58(2), pages 124-151, April.
    7. Korkeamaki, Timo & Moore, William T., 2004. "Capital investment timing and convertible debt financing," International Review of Economics & Finance, Elsevier, vol. 13(1), pages 75-85.
    8. Mauer, David C. & Sarkar, Sudipto, 2005. "Real options, agency conflicts, and optimal capital structure," Journal of Banking & Finance, Elsevier, vol. 29(6), pages 1405-1428, June.
    9. Timo P. Korkeamaki & William T. Moore, 2004. "Convertible Bond Design and Capital Investment: The Role of Call Provisions," Journal of Finance, American Finance Association, vol. 59(1), pages 391-405, 02.
    10. Egami, Masahiko, 2010. "A game options approach to the investment problem with convertible debt financing," Journal of Economic Dynamics and Control, Elsevier, vol. 34(8), pages 1456-1470, August.
    11. Brennan, M J & Schwartz, Eduardo S, 1977. "Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion," Journal of Finance, American Finance Association, vol. 32(5), pages 1699-1715, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2407-2416. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.