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Managerial Opportunism and Capital Structure Adjustments: Equity–for–debt Swap and Convertible Debt
Author(s) -
Isagawa Nobuyuki
Publication year - 2003
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/1468-2443.00033
Subject(s) - senior debt , gearing ratio , equity value , capital structure , convertible bond , internal debt , recourse debt , business , opportunism , swap (finance) , debt ratio , debt levels and flows , finance , debt to gdp ratio , debt , cost of capital , financial system , economics , profit (economics) , microeconomics , market economy
This paper shows how capital structure adjustments through an equity–for–debt swap and convertible debt can resolve the inefficiency caused by managerial opportunism. We consider a situation in which a corporate manager's investment decision is affected by the firm's debt level. Although both an equity–for–debt swap and convertible debt can induce the self–interested manager to undertake only value–increasing projects through capital structure adjustments, there exists a significant difference between these two financial instruments. An equity–for–debt swap, which requires the agreement of both shareholders and debt holders, can change a firm's debt level only prior to the manager's investment decision. On the other hand, convertible debt, which gives debt holders a unilateral right to convert, can change a firm's debt level even after the manager's investment decision.