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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/27089

Title: Investment Opportunities and the Design of Debt Securities
Authors: Kahan, Marcel
Yermack, David
Issue Date: Aug-1996
Series/Report no.: FIN-96-031
Abstract: We investigate a puzzling empirical regularity: the near-total absence of restrictive covenants from convertible bonds issued by U.S. companies. In a study of 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. The results support an interpretation that covenants impose costs by limiting managers’ choices, leading firms that value managerial flexibility to prefer convertibility as a method of reducing the agency costs of debt.
URI: http://hdl.handle.net/2451/27089
Appears in Collections:Finance Working Papers

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