Convertible debt under asymmetric information and agency problems: A solution to the convertible debt puzzle
Abstract
I develop a model with asymmetric information and agency problems that explains the negative stock price reactions observed when convertible bonds are issued and when they are subsequently called. This model constitutes an improvement over previous theories of convertible debt that consider these stock price reactions separately and neglect the possibility of agency conflicts. The empirical analysis supports the model, with firms that have a higher probability of agency conflicts experiencing significantly more negative price reactions at the offering announcement day. These firms also experience more adverse price reactions when the calling of these bonds is announced. Finally, consistent with the unified model, I document a positive relation between abnormal returns at issuance and the time elapsed between issuance and calling of convertible bonds.
Degree
Ph.D.
Advisors
Martell, Purdue University.
Subject Area
Finance
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