IDEAS home Printed from https://ideas.repec.org/a/wly/revfec/v9y2000i1p15-26.html
   My bibliography  Save this article

Convertible debt: an effective financial instrument to control managerial opportunism

Author

Listed:
  • Nobuyuki Isagawa

Abstract

This paper discusses the superiority of convertible debt to common debt and equity in controlling managerial opportunism. When managers have both empire‐building tendencies and fears of default, over‐investment occurs under low debt levels and under‐investment occurs under high debt levels. Convertible debt, which can adjust firms' debt levels by its convertibility, can restrict over‐investment and help firms to avoid under‐investment at the same time. In a simple setting, we show that well‐designed callable convertible debt has an important role in controlling managerial opportunistic behavior that neither common debt nor equity has.

Suggested Citation

  • Nobuyuki Isagawa, 2000. "Convertible debt: an effective financial instrument to control managerial opportunism," Review of Financial Economics, John Wiley & Sons, vol. 9(1), pages 15-26, March.
  • Handle: RePEc:wly:revfec:v:9:y:2000:i:1:p:15-26
    DOI: 10.1016/S1058-3300(00)00014-8
    as

    Download full text from publisher

    File URL: https://doi.org/10.1016/S1058-3300(00)00014-8
    Download Restriction: no

    File URL: https://libkey.io/10.1016/S1058-3300(00)00014-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jaffee, Dwight & Shleifer, Andrei, 1990. "Costs of Financial Distress, Delayed Calls of Convertible Bonds, and the Role of Investment Banks," The Journal of Business, University of Chicago Press, vol. 63(1), pages 107-123, January.
    2. Brennan, Michael J & Kraus, Alan, 1987. "Efficient Financing under Asymmetric Information," Journal of Finance, American Finance Association, vol. 42(5), pages 1225-1243, December.
    3. Hirshleifer, David & Thakor, Anjan V, 1992. "Managerial Conservatism, Project Choice, and Debt," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 437-470.
    4. John J. McCall, 1982. "The Economics of Information and Uncertainty," NBER Books, National Bureau of Economic Research, Inc, number mcca82-1, May.
    5. Stulz, ReneM., 1990. "Managerial discretion and optimal financing policies," Journal of Financial Economics, Elsevier, vol. 26(1), pages 3-27, July.
    6. Sanford J. Grossman & Oliver D. Hart, 1982. "Corporate Financial Structure and Managerial Incentives," NBER Chapters, in: The Economics of Information and Uncertainty, pages 107-140, National Bureau of Economic Research, Inc.
    7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    8. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
    9. Walter Novaes, 2003. "Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency," The Journal of Business, University of Chicago Press, vol. 76(1), pages 49-82, January.
    10. Leland E. Crabbe & Jean Hewlege, 1994. "Alternative Tests of Agency Theories of Callable Corporate Bonds," Financial Management, Financial Management Association, vol. 23(4), Winter.
    11. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-585, June.
    12. Kang, Jun-Koo & Stulz, Rene M, 1996. "How Different Is Japanese Corporate Finance? An Investigation of the Information Content of New Security Issues," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 109-139.
    13. Green, Richard C., 1984. "Investment incentives, debt, and warrants," Journal of Financial Economics, Elsevier, vol. 13(1), pages 115-136, March.
    14. K. G. Nyborg, 1996. "The use and pricing of convertible bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(3), pages 167-190.
    15. Nyborg Kjell G., 1995. "Convertible Debt as Delayed Equity: Forced versus Voluntary Conversion and the Information Role of Call Policy," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 358-395, October.
    16. Jalan, P. & Barone-Adesi, G., 1995. "Equity financing and corporate convertible bond policy," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 187-206, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marion Schulz, 2007. "Wandelanleihen als Leistungsanreizmechanismus," Schmalenbach Journal of Business Research, Springer, vol. 59(3), pages 333-354, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Isagawa, Nobuyuki, 2000. "Convertible debt: an effective financial instrument to control managerial opportunism," Review of Financial Economics, Elsevier, vol. 9(1), pages 15-26.
    2. Isagawa, Nobuyuki, 2002. "Callable convertible debt under managerial entrenchment," Journal of Corporate Finance, Elsevier, vol. 8(3), pages 255-270, July.
    3. Gomes, Armando & Phillips, Gordon, 2012. "Why do public firms issue private and public securities?," Journal of Financial Intermediation, Elsevier, vol. 21(4), pages 619-658.
    4. Chao, Ching-Hsiang & Huang, Chih-Jen & Ho, Ruey-Jenn & Huang, Hsin-Yi, 2022. "Catering to investors through capital expenditures: Testing assets substitution problem around financing," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    5. Loncarski, I. & Ter Horst, J.R. & Veld, C.H., 2006. "Why do Companies issue Convertible Bond Loans? An Empirical Analysis for the Canadian Market," Discussion Paper 2006-65, Tilburg University, Center for Economic Research.
    6. Dutordoir, Marie & Strong, Norman & Ziegan, Marius C., 2014. "Does corporate governance influence convertible bond issuance?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 80-100.
    7. Christian Dorion & Pascal François & Gunnar Grass & Alexandre Jeanneret, 2014. "Convertible Debt and Shareholder Incentives," Cahiers de recherche 1403, CIRPEE.
    8. Antonczyk, Ron Christian & Salzmann, Astrid Juliane, 2014. "Overconfidence and optimism: The effect of national culture on capital structure," Research in International Business and Finance, Elsevier, vol. 31(C), pages 132-151.
    9. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    10. Mohamed, Hisham Hanifa & Masih, Mansur & Bacha, Obiyathulla I., 2015. "Why do issuers issue Sukuk or conventional bond? Evidence from Malaysian listed firms using partial adjustment models," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 233-252.
    11. Joseph P. Hughes & Choon-Geol Moon & William W. Lang & Michael S. Pagano, 2001. "Managerial Incentives and the Efficiency of Capital Structure," Departmental Working Papers 200102, Rutgers University, Department of Economics.
    12. Jayati Sarkar & Subrata Sarkar, 2005. "Debt and corporate governance in emerging economies: Evidence from India," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2005-007, Indira Gandhi Institute of Development Research, Mumbai, India.
    13. Suchard, Jo-Ann, 2007. "The impact of rights issues of convertible debt in Australian markets," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 187-202, July.
    14. Khalid Elbadraoui & Jean-Jacques Lilti & Bouchra M'Zali, 2008. "La performance opérationnelle à long terme des entreprises françaises émettrices d’obligations convertibles," Revue Finance Contrôle Stratégie, revues.org, vol. 11(3), pages 125-154, September.
    15. Ruben Arrondo & Silvia Gomez-Anson, 2003. "A study of Spanish firms' security issue decision under asymmetric information and agency costs," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 771-782.
    16. Joseph P. Hughes & William W. Lang & Choon-Geol Moon & Michael S. Pagano, 2004. "Managerial Incentives and the Efficiency of Capital Structure in U.S. Commercial Banking," Departmental Working Papers 200401, Rutgers University, Department of Economics.
    17. Thomas J. Chemmanur & Karen Simonyan, 2010. "What Drives the Issuance of Putable Convertibles: Risk‐Shifting, Asymmetric Information, or Taxes?," Financial Management, Financial Management Association International, vol. 39(3), pages 1027-1068, September.
    18. Dorion, Christian & François, Pascal & Grass, Gunnar & Jeanneret, Alexandre, 2014. "Convertible debt and shareholder incentives," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 38-56.
    19. Canarella, Giorgio & Miller, Stephen M., 2022. "Firm size, corporate debt, R&D activity, and agency costs: Exploring dynamic and non-linear effects," The Journal of Economic Asymmetries, Elsevier, vol. 25(C).
    20. Doan, Trang & Nguyen, Nga Q., 2018. "Boards of directors and firm leverage: Evidence from real estate investment trusts," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 109-124.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:revfec:v:9:y:2000:i:1:p:15-26. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://doi.org/10.1002/(ISSN)1873-5924 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.