Costs Of Financial Distress, Delayed Calls Of Convertible Bonds, And The Role Of Investment Banks / Dwight Jaffee, Andrei Shleifer.

Format:

Book

Author/Creator:

Jaffee, Dwight M., 1943-2016.

Contributor:

National Bureau of Economic Research.

Shleifer, Andrei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2558.

NBER working paper series no. w2558

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1988.

Summary:

In a frictionless market with perfect information, a shareholder-wealth- maximizing firm should force conversion of its convertible bond issue into stock as soon as the bond comes in-the-money. Firms however appear to systematically delay forced conversion, sometimes for years, beyond this time. We show that the observed delays can be plausibly explained in terms of costs to shareholders of a failed conversion and the ensuing financial distress. Firms delay the forced conversion to avoid the self-fulfilling outcome that bondholders expect the conversion to fail, tender their bonds for cash, and the stock price falls to account for the costs of financial distress, in which case tendering for cash is in fact optimal. Unlike other explanations of delayed forced conversion, we can explain the common use of investment banks to underwrite these transactions, since the banks can eliminate the self-fulfilling bad outcome.

Notes:

Print version record

April 1988.