Convertible debt; risk-shifting; noncooperative game
Abstract :
[en] Convertible debt eliminates asset substitution in a one-period setting (Green, 1984). But convertible debt terms are usually set before the asset substitution opportunity. This allows shareholders and convertible debtholders to play a strategic noncooperative game. Two risk-shifting Nash equilibria are attainable: pure asset substitution when, despite no conversion, shareholders benefit from shifting risk, and strategic conversion when, despite early conversion, convertible debtholders expropriate wealth from straight debtholders. Even when initial convertible debt is designed to minimize the risk-shifting likelihood, the risk of asset substitution remains economically substantial — contrasting with the agency theoretic rationale for issuing convertible debt.
Disciplines :
Finance
Author, co-author :
François, Pascal; HEC Montréal
Hübner, Georges ; Université de Liège - ULiège > HEC-Ecole de gestion : UER > Gestion financière
Papageorgiou, Nicolas; HEC Montréal
Language :
English
Title :
Strategic Analysis of Risk-Shifting Incentives with Convertible Debt
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