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Open AccessArticle

Mandatory Convertible Bonds and the Agency Problem

Department of Organization Engineering, Business Administration and Statistics, Industrial Engineering School, Universidad Politécnica de Madrid (UPM), 28006 Madrid, Spain
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Sustainability 2019, 11(15), 4074; https://doi.org/10.3390/su11154074
Received: 2 June 2019 / Revised: 21 July 2019 / Accepted: 26 July 2019 / Published: 28 July 2019
(This article belongs to the Section Economic and Business Aspects of Sustainability)
A large proportion of the academic literature about the agency problem focuses on corporate governance or the instruments that can be used to balance the incentives of shareholders and debt holders. Following the real options company valuation framework, one method to increase shareholder value involves increasing the intrinsic risk of the firm; however, such a practice reduces the bondholder value. We analyzed an innovative balance sheet instrument, the mandatory convertible bond, as a means to increase financial sustainability of companies, improving the value for shareholders without increasing the perceived default risk. The results of the empirical analysis illustrate that for companies in a weak credit position, the agency problem can be mitigated by the issuance of mandatory convertible bonds, which allows managers to increase company risk without being detrimental for bondholders. However, when the probability of distress is small, shareholders have less incentive to increase company risk than in a company funded by mandatory convertible bonds, being more aligned with bondholders. A better alignment of debt holders and shareholders incentives reduces inefficiencies, mitigates the probably of distress, and improves the long-term financial sustainability of companies and can promote stable growth and innovation. View Full-Text
Keywords: mandatory convertible bonds; agency problem; sustainable finance; volatility; real options mandatory convertible bonds; agency problem; sustainable finance; volatility; real options
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Huerga, A.; Rodríguez-Monroy, C. Mandatory Convertible Bonds and the Agency Problem. Sustainability 2019, 11, 4074.

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