Investigating the effectiveness of convertible bonds in reducing agency costs: A Monte-Carlo approach
AbstractSimulation and option pricing techniques are used to value the marginal effect of asset risk on stock value. I find the optimal mix of stock, debt and convertible bonds that reduces this marginal effect to zero. At this optimal point the agency costs of debt are minimized. The incentive to add risky projects that arises from ordinary debt is offset by the incentive to ignore risky projects that arises from convertible debt.
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Bibliographic InfoArticle provided by Elsevier in its journal The Quarterly Review of Economics and Finance.
Volume (Year): 49 (2009)
Issue (Month): 4 (November)
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Web page: http://www.elsevier.com/locate/inca/620167
Agency costs Convertible bonds Capital structure Real options Simulations;
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