Convertible bond maturity and debt overhang

Liu Gan, Xin Xia, Wenyang Xu and Hai Zhang

International Review of Financial Analysis, 2024, vol. 95, issue PB

Abstract: We develop a dynamic corporate investment model to investigate the determinants of the optimal maturity structure of convertible bonds and its debt overhang effect. Our model predicts that relative to the issuance of straight bonds, companies opting for short-term (long-term) convertible bonds tend to expedite (delay) their investment activities, thereby alleviating (exacerbating) issues related to underinvestment. This outcome provides a theoretical rationale for the observed trend of decreasing convertible bond maturity, as explained by debt overhang theory. Moreover, contrary to previous findings, a growth company optimally chooses to issue convertibles with shorter maturities when it has fewer valuable growth opportunities. These insights improve our understanding of the interactions between convertible bond maturity and corporate investment.

Keywords: Convertible debt; Investment; Maturity structure (search for similar items in EconPapers)
JEL-codes: G13 G32 G33 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003429

DOI: 10.1016/j.irfa.2024.103410

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