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Convertible Bonds as "Back Door" Equity Financing

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  • Jeremy C. Stein

Abstract

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.

Suggested Citation

  • Jeremy C. Stein, 1992. "Convertible Bonds as "Back Door" Equity Financing," NBER Working Papers 4028, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4028
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    References listed on IDEAS

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    1. Jaffee, Dwight & Shleifer, Andrei, 1990. "Costs of Financial Distress, Delayed Calls of Convertible Bonds, and the Role of Investment Banks," The Journal of Business, University of Chicago Press, vol. 63(1), pages 107-123, January.
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