Investment Opportunities and the Design of Debt Securities

36 Pages Posted: 11 Nov 2008

See all articles by Marcel Kahan

Marcel Kahan

New York University School of Law; European Corporate Governance Institute

David Yermack

New York University (NYU) - Stern School of Business

Multiple version iconThere are 4 versions of this paper

Date Written: November 1995

Abstract

We investigate whether convertibility provisions and restrictive covenants operate as substitute methods for reducing agency costs of debt. In a study of the 192 recent debt issues, we find that an issuer s investment opportunities are negatively related to the presence of covenants and positively associated with the incidence of convertibility after controlling for investment opportunities. The results support an interpretation that covenants impose costs by limiting mangers choices, leading firms that value managerial flexibility to prefer convertibility provisions as a method of reducing the agency costs of debt.

Suggested Citation

Kahan, Marcel and Yermack, David, Investment Opportunities and the Design of Debt Securities (November 1995). NYU Working Paper No. FIN-95-026, Available at SSRN: https://ssrn.com/abstract=1298340

Marcel Kahan (Contact Author)

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David Yermack

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