Convertible bonds with resettable conversion prices

Junfeng Qiu () and Yongli Zhang

Economic Modelling, 2013, vol. 31, issue C, 198-205

Abstract: We examine the convertible bonds whose conversion prices can be reset under certain conditions, by extending the asymmetric information framework of Stein (1992). These convertibles are more common in Japan and China and are in sharp contrast with the convertible bonds with fixed conversion prices. We find that resettable convertibles can help firms reduce liquidity cost. But the adverse selection problem caused by bad firms may be exacerbated if the cost of financial distress is not sufficiently high. Firms can mitigate the problem through costly signaling with fixed-price convertibles. Finally, we show that pooling and separating equilibria may coexist for some parameter values.

Keywords: Convertible bonds; Resettable conversion prices; Corporate financing; Adverse selection; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 D83 G15 G32 (search for similar items in EconPapers)
Date: 2013
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:ecmode:v:31:y:2013:i:c:p:198-205

DOI: 10.1016/j.econmod.2012.11.058

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