Analyzing Owned Capital Constraint And Asset Subsititution When Financing Through Convertible Bonds

The paper begins with the interest conflicts between stockholders and creditors , then try to explain its reason and the main behaviors of the moral hazard from stockholders , and pays more attention on the moral hazard of asset subsititution.By analyzing the influnce of asset subsititution to the distribution of rights, interest and risk among the interested party such as stockholders and creditors, we want to find a way to decrease the agent cost between stockholders and creditors.Convertible bonds, with some special quality , can be transformed to stocks, which supplys a good way to overcome asset subsititution. Owned capital of enterprise have influence on its financing method, and can avoid the asset subsititution behavior of stockholders. In the paper, the problem of owned capital constraint when financing through convertible bonds is also involved in .A model is built to explain how the convertible bonds avoid the conflicts between stockholders and creditors , especially the asset subsititution behavior of stockholders, and the influence of convertible bonds to owned capital constraint. Comparing the two situations which is for enterprise to issue and not to issue convertible bonds, we can draw a conclusion that: It is more strictly constrainted for enterprise to finance through convertible bonds than no convertible bonds; moreover through convertible bonds the probability area of asset subsititution is been largely decreased, so it can efficiently avoid the moral hazard of asset subsititution from stockholders.Because of the special quality of convertible bonds to avoid the moral hazard of asset subsititution from stockholders, considering the present financing situation through convertible bonds, we think: It must be changed that corporate finances mainly through stock; it's necessary to develop bonds market especially convertible bonds market. We make some suggestions about how utilize convertible bonds to decrease agent cost in financing through debt.