Security design with status concerns

Suleyman Basak, Dmitry Makarov (), Alex Shapiro and Marti Subrahmanyam

Journal of Economic Dynamics and Control, 2020, vol. 118, issue C

Abstract: This paper provides a status-based explanation for convertible securities. An entrepreneur with status concerns inducing risk-taking decides how to finance the firm and how to dynamically manage it. Solving analytically for the optimal security, we find that it is substantially similar to a convertible security. Our model can explain why convertible securities are mainly issued by start-ups and small firms, as we show that their salient characteristics, higher volatility and dynamic flexibility, accentuate incentives to issue convertible securities. We also provide analytical results relevant to quantifying how status concerns affect credit risk, an established factor behind security choice.

Keywords: Security design; Status concerns; Convertible securities; Financing; Hybrid securities (search for similar items in EconPapers)
JEL-codes: C61 D86 G24 G32 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:118:y:2020:i:c:s0165188920301445

DOI: 10.1016/j.jedc.2020.103976

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