EQUITY FINANCING AND CORPORATE CONVERTIBLE BOND POLICY

A co-operative game playing model is used to examine ex ante the decision parameters which are involved in the selection of callable convertible bonds as a means of delayed equity financing. The differential tax treatment of coupon interest and dividend payments, coupled with market friction and incompleteness, provides sufficient reason for convertible debt issuance. Though there is a myopic incentive to expropriate wealth from convertible bondholders by inducing early conversion, value-maximizing managers choose to delay calling in order to maintain access to capital markets on favorable terms.