The impact of convertible debt financing on investment timing

Kyoko Yagi and Ryuta Takashima

Economic Modelling, 2012, vol. 29, issue 6, 2407-2416

Abstract: We develop a model to examine the timing of investment decisions in relation to the issuance of convertible debt by firms. Our model shows that when the demand shock has higher volatility, the firm finances the investment cost with high-coupon convertible debt. We find that default occurs earlier for firms that finance with convertible debt rather than with straight debt. We also find that firms with high-growth prospection, high volatility, and low capital costs that issue convertible debt tend to defer investments. Furthermore, we examine the investment decisions in which the convertible debt includes a call provision. We show that firms that use callable convertible debt invest earlier than those that use non-callable convertible debt by using suboptimal coupon payments. The opportunity from the forced conversion increases as the volatility increases. These results are consistent with recent empirical evidence.

Keywords: Irreversible investment; Convertible debt; Capital structure; Call provisions; Real options (search for similar items in EconPapers)
JEL-codes: D81 D92 G13 G32 G33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:29:y:2012:i:6:p:2407-2416

DOI: 10.1016/j.econmod.2012.06.032

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