Article Abstract:
An attempt is made to resolve two problems related to convertible debt calls, the first being that although it has been shown that conversion of the bonds should be optimally forced as soon as feasible, the calls are delayed significantly, and the second being that common stock returns are significantly negative around the call of a convertible debt issue announcement. Simultaneous rationalization of observed call decisions by managers and the reaction to them from the market when managers behave optimally given their private information, compensation schemes, and reactions of investors to their call decisions is attempted. The reaction of investors is shown to be rational in terms of Bayes' rule given the call policy of managers. Decisions to call are perceived correctly in equilibrium by the market as a signal of unfavorable private information; several testable implications are derived in addition to observed call delay rationalizations and negative stock returns at call announcement.
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Article Abstract:
This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided. (Reprinted by permission of the publisher.)
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Article Abstract:
We study the capital allocation process within firms. Observed budgeting processes are explained as a response to decentralized information and incentive problems. It is shown that these imperfections can result in underinvestment when capital productivity is high and overinvestment when it is low. We also investigate how the budgeting process may be expected to vary with firm or division characteristics such as investment opportunities and the technology for information transfer. (Reprinted by permission of the publisher.)
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