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Title: A game options approach to the investment problem with convertible debt financing
Authors: Egami, Masahiko  kyouindb  KAKEN_id  orcid (unconfirmed)
Author's alias: 江上, 雅彦
Keywords: Convertible bond
Investment decision
Optimal stopping
Game options
Issue Date: Aug-2010
Publisher: Elsevier B.V.
Journal title: Journal of Economic Dynamics and Control
Volume: 34
Issue: 8
Start page: 1456
End page: 1470
Abstract: We consider a firm that operates a single plant and has an expansion option to invest in a new plant with convertible debt financing. This conversion feature introduces another complication not only because of the added conversion timing problem (by the bond holder) but also because the equity holder needs to take future conversion into account when evaluating her expansion/financing decision. We have two main objectives here. We use game options techniques to analyze optimal strategies involved in this convertible debt financed expansion problem. The first goal is to provide a comprehensive framework and procedure for solving the problem in a mathematically tractable way. Secondly, we illustrate our solution method through a concrete example with economic analysis. This includes a comparison with straight bond financing and comparative statics with respect to price volatility and conversion ratio. In this regard, we attempt to clarify how the conversion feature affects the equity holder's investment decisions. Throughout the paper, we study expansion options by viewing a firm's existing operation, bankruptcy threat, conversion decisions and financing decisions all together.
Rights: © 2010 Elsevier B.V.
This is not the published version. Please cite only the published version.
DOI(Published Version): 10.1016/j.jedc.2010.04.001
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