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Investment Opportunities and the Design of Debt Securities

  • Marcel Kahan
  • David Yermack

We 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.

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File URL: http://www.stern.nyu.edu/~sbrown/working/yermack/convert.pdf
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Paper 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.

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Date of creation: Aug 1996
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Handle: RePEc:fth:nystfi:96-31
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/

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