Catering to investors through capital expenditures: Testing assets substitution problem around financing

Ching-Hsiang Chao, Chih-Jen Huang, Ruey-Jenn Ho and Hsin-Yi Huang

The North American Journal of Economics and Finance, 2022, vol. 59, issue C

Abstract: We test the catering theory, which describes how investor preferences might influence individual firms' investment financing decisions. To the best of our knowledge, our study may well be the first that directly connects catering with asset substitution to contrast the magnitude of catering by bondholders and shareholders. And indeed, it is interesting to find that although catering behavior is found to exist among both corporate bond and seasoned equity offering (SEO) managers, the coexistence of both appears to offset the abnormal investment phenomena of either underinvestment or overinvestment. The study results further reveal that firms engage in overinvestment when catering to conversion holders of existing convertible bonds. Taken together, we find that support for the asset substitution and abnormal investment argument is strong from a stockholder–bondholder conflict.

Keywords: Asset substitution; Catering; Capital expenditures; Conversion; Financing (search for similar items in EconPapers)
JEL-codes: G02 G10 G14 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821001698

DOI: 10.1016/j.najef.2021.101561

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