A theory of mandatory convertibles: distinct features for large repeated financing

Susheng Wang

The European Journal of Finance, 2018, vol. 24, issue 4, 347-362

Abstract: In recent years, mandatory convertibles (MCs) have become a popular means of raising capital, especially for large projects. This paper is the first theoretical paper to investigate MCs using the incomplete-contract approach. We show that MCs can be an efficient instrument in sequential financing. MCs have some distinct features compared to other convertibles, such as mandatory conversion, a high dividend rate, and capped capital appreciation. We show in theory that these features are designed to achieve efficiency.

Date: 2018
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DOI: 10.1080/1351847X.2017.1285337

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