Mandatory Convertible Bonds and the Agency Problem

Huerga, Ángel and Rodríguez Monroy, Carlos (2019). Mandatory Convertible Bonds and the Agency Problem. "Sustainability", v. 11 (n. 15); pp. 4074-4094. ISSN 2071-1050. https://doi.org/10.3390/su11154074.

Description

Title: Mandatory Convertible Bonds and the Agency Problem
Author/s:
  • Huerga, Ángel
  • Rodríguez Monroy, Carlos
Item Type: Article
Título de Revista/Publicación: Sustainability
Date: 28 July 2019
ISSN: 2071-1050
Volume: 11
Subjects:
Freetext Keywords: mandatory convertible bonds; agency problem; sustainable finance; volatility; real options
Faculty: E.T.S.I. Industriales (UPM)
Department: Ingeniería de Organización, Administración de Empresas y Estadística
Creative Commons Licenses: Recognition - No derivative works - Non commercial

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Abstract

A large proportion of the academic literature about the agency problem focuses on corporate governance or the instruments that can be used to balance the incentives of shareholders and debt holders. Following the real options company valuation framework, one method to increase shareholder value involves increasing the intrinsic risk of the firm; however, such a practice reduces the bondholder value. We analyzed an innovative balance sheet instrument, the mandatory convertible bond, as a means to increase financial sustainability of companies, improving the value for shareholders without increasing the perceived default risk. The results of the empirical analysis illustrate that for companies in a weak credit position, the agency problem can be mitigated by the issuance of mandatory convertible bonds, which allows managers to increase company risk without being detrimental for bondholders. However, when the probability of distress is small, shareholders have less incentive to increase company risk than in a company funded by mandatory convertible bonds, being more aligned with bondholders. A better alignment of debt holders and shareholders incentives reduces inefficiencies, mitigates the probably of distress, and improves the long-term financial sustainability of companies and can promote stable growth and innovation.

More information

Item ID: 64424
DC Identifier: http://oa.upm.es/64424/
OAI Identifier: oai:oa.upm.es:64424
DOI: 10.3390/su11154074
Official URL: https://www.mdpi.com/2071-1050/11/15/4074
Deposited by: Memoria Investigacion
Deposited on: 15 Oct 2020 15:54
Last Modified: 15 Oct 2020 15:54
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