Investment Opportunities and the Design of Debt Securities
AbstractWe investigate a puzzling empirical regularity: the near-total absence of restrictive covenants from convertible bonds issued by U.S. companies. In a study of 192 recent debt issues, we find that an issuer's investment opportunities are negatively related to the presence of covenants and positively associated with the incidence of convertibility. The results support an interpretation that covenants impose costs by limiting managers' choices, leading firms that value managerial flexibility to prefer convertibility as a method of reducing the agency costs of debt.
Download InfoIf 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.
Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 96-31.
Date of creation: Aug 1996
Date of revision:
Contact details of provider:
Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
More information through EDIRC
Other versions of this item:
- Kahan, Marcel & Yermack, David, 1998. "Investment Opportunities and the Design of Debt Securities," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(1), pages 136-51, April.
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- King, Tao-Hsien Dolly & Wen, Min-Ming, 2011. "Shareholder governance, bondholder governance, and managerial risk-taking," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 512-531, March.
- John, Kose & Reisz, Alexander S., 2010. "Temporal resolution of uncertainty, disclosure policy, and corporate debt yields," Journal of Corporate Finance, Elsevier, vol. 16(5), pages 655-678, December.
- Nash, Robert C. & Netter, Jeffry M. & Poulsen, Annette B., 2003. "Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants," Journal of Corporate Finance, Elsevier, vol. 9(2), pages 201-232, March.
- Howe, John S. & Su, Tie, 2001. "Discretionary reductions in warrant exercise prices," Journal of Financial Economics, Elsevier, vol. 61(2), pages 227-252, August.
- Michael R Roberts & Michael Bradley, 2004. "Are Bond Covenants Priced?," Econometric Society 2004 North American Summer Meetings 7, Econometric Society.
- Dailami, Mansoor & Hauswald, Robert, 2000. "Risk shifting and long-term contracts : evidence from the Ras Gas Project," Policy Research Working Paper Series 2469, The World Bank.
- Lewis, Craig M. & Rogalski, Richard J. & Seward, James K., 2003. "Industry conditions, growth opportunities and market reactions to convertible debt financing decisions," Journal of Banking & Finance, Elsevier, vol. 27(1), pages 153-181, January.
- Black, Ervin L. & Carnes, Thomas A. & Mosebach, Michael & Moyer, Susan E., 2004. "Regulatory monitoring as a substitute for debt covenants," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 367-391, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.