The Rodney L. White Center for Financial Research Asymmetric Information and Financing with Convertibles
نویسندگان
چکیده
Asymmetric information regarding project prospects causes dilution, leading to adverse selection and inefficiencies in the market for new investments. However, if the market obtains information about the firm over time, issuing callable convertible securities with restrictive call provisions is optimal. Even when the market’s information is noisy, such securities can be designed to make the payoff to new claimholders independent of the private information of the manager. The restrictive call provision serves as a commitment device, enabling the manager to call only when the stock price rises in the future. This solves the dilution and adverse selection problem costlessly. The same first—best efficient outcome can also be implemented by issuing floating price and mandatory convertibles. JEL Classification Numbers: G32, D82.
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