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A SEQUENTIAL SIGNALING MODEL OF CONVERTIBLE DEBT ISSUE AND CALL POLICIES
Author(s) -
Lee Yul W.
Publication year - 2000
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2000.tb00810.x
Subject(s) - convertible bond , convertible , callable bond , debt , embedded option , equity (law) , convertible arbitrage , business , economics , stock (firearms) , monetary economics , finance , financial economics , valuation (finance) , interest rate , capital asset pricing model , risk arbitrage , mechanical engineering , law , structural engineering , arbitrage pricing theory , political science , engineering
This paper offers a new explanation for why some risk‐averse firms may prefer to issue callable convertible debt. Here, the convertible debt issue and call policies are integrated into a unified financing policy. It is then shown that for firms with relatively low unsystematic risk, convertible debt issuance followed by an appropriate in‐the‐money signaling call policy reduces more unsystematic equity risk than equity, callable straight debt, or their combination. The model is modified to incorporate asymmetric information at the issue stage to explain the stock price behavior at announcements of convertible debt sales.