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Investigating the effectiveness of convertible bonds in reducing agency costs: A Monte-Carlo approach

Mazhar A. Siddiqi

The Quarterly Review of Economics and Finance, 2009, vol. 49, issue 4, 1360-1370

Abstract: Simulation and option pricing techniques are used to value the marginal effect of asset risk on stock value. I find the optimal mix of stock, debt and convertible bonds that reduces this marginal effect to zero. At this optimal point the agency costs of debt are minimized. The incentive to add risky projects that arises from ordinary debt is offset by the incentive to ignore risky projects that arises from convertible debt.

Keywords: Agency; costs; Convertible; bonds; Capital; structure; Real; options; Simulations (search for similar items in EconPapers)
Date: 2009
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Handle: RePEc:eee:quaeco:v:49:y:2009:i:4:p:1360-1370