Convertible Bonds as "Back Door" Equity Financing

Jeremy C. Stein

NBER Working Paper No. 4028
Issued in March 1992
NBER Program(s):   CF

This paper argues that corporations may use convertible bonds as an indirect (albeit possibly risky) method for getting equity into their capital structures in situations where adverse selection problems make a conventional stock issue unattractive. Unlike other theories of convertible bond issuance, the model of this paper highlights: 1) the importance of call provisions on convertibles; and 2) the significance of costs of financial distress to the Information content of a convertible issue.

(944 K)

Published: Journal of Financial Economics, vol 32, no. 2 pp. 3-21 (August 1992)

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