Convertible bond maturity and debt overhang

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Gan, Liu and Xia, Xin and Xu, Wenyang and Zhang, Hai (2024) Convertible bond maturity and debt overhang. International Review of Financial Analysis, 95 (Pt. B). 103410. ISSN 1057-5219 (https://doi.org/10.1016/j.irfa.2024.103410)

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Abstract

We develop a dynamic corporate investment model to investigate the determinants of the optimal maturity structure of convertible bonds and its debt overhang effect. Our model predicts that relative to the issuance of straight bonds, companies opting for short-term (long-term) convertible bonds tend to expedite (delay) their investment activities, thereby alleviating (exacerbating) issues related to underinvestment. This outcome provides a theoretical rationale for the observed trend of decreasing convertible bond maturity, as explained by debt overhang theory. Moreover, contrary to previous findings, a growth company optimally chooses to issue convertibles with shorter maturities when it has fewer valuable growth opportunities. These insights improve our understanding of the interactions between convertible bond maturity and corporate investment.

ORCID iDs

Gan, Liu, Xia, Xin, Xu, Wenyang and Zhang, Hai ORCID logoORCID: https://orcid.org/0000-0001-9319-346X;
  • Item type:Article
    ID code:89884
    Dates:
    Date
    Event
    1 October 2024
    Published
    29 June 2024
    Published Online
    19 February 2024
    Accepted
    2 February 2023
    Submitted
    Subjects:Social Sciences > Finance
    Department:Strathclyde Business School > Accounting and Finance
    Depositing user: Pure Administrator
    Date deposited:09 Jul 2024 14:55
    Last modified:11 Nov 2024 14:23
    URI:https://strathprints.strath.ac.uk/id/eprint/89884
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