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Convertible debt and corporate R&D investment decisions

Author

Listed:
  • Gan, Liu
  • Xia, Xin
  • Xiang, Hua

Abstract

We develop a continuous-time finance model to investigate the impact of convertible debt on corporate research and development (R&D) investment decisions. Our model predicts that an increase in the ratio of convertible debt to total debt induces firms to delay investment in R&D projects but encourages higher R&D investment intensity. Additionally, we demonstrate a U-shaped relationship between the probability of R&D termination and the convertible debt ratio. Finally, as the convertible debt ratio increases, the option value of R&D investment decreases, and the value of the firm at the time of R&D project initiation increases. These findings may yield novel practical implications for firms seeking to use convertible debt to promote innovation.

Suggested Citation

  • Gan, Liu & Xia, Xin & Xiang, Hua, 2025. "Convertible debt and corporate R&D investment decisions," Finance Research Letters, Elsevier, vol. 86(PD).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pd:s1544612325018434
    DOI: 10.1016/j.frl.2025.108589
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Keywords

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    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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