Research On Convertible Debt And Firm Investment Decision Under Private Benefits Of Control

Since convertible debt has the character of being converted into equity and can bring many benefits to the financial market,it's favored by more and more domestic and foreign listed companies.Many scholars had studied the pricing,capital structure and investment decisions of convertible debt,however,in view of the prevalence of equity concentration and the fact that private benefits of control is particularly serious in the firm,it is of great practical significance to study the related problems of convertible debt financing for firm under private benefits of control.Based on existence of private benefits of control in firm,the paper studied the impact of convertible debt on the firm capital structure,real option value,investment decisions,agency costs and debt overhang effect.First of all,the paper studied the pricing of securities and the optimal capital structure of the firm.The results of numerical analysis show that the coupon and the ratio of controlling shareholder's encroachment to cash flow has a significant impact on the optimal bankruptcy level,optimal conversion level,controlling shareholder value and firm value.Our study found that the existence of private benefits of control make convertible debt investors delay the conversion of convertible debt into equity,and significantly reduce the firm's value.As the the ratio of controlling shareholder's encroachment to cash flow increases,controlling shareholder will have a tendency to delay bankruptcy at first and then have a tendency to accelerate bankruptcy.Compared with straight debt,convertible debt reduce the total firm value,that is,all the firm's stakeholders prefer to issue straight debt,but for the controlling shareholder,when the coupon is small,the straight debt is better than the convertible bond,when the coupon is gradually increased to a certain value,then convertible debt is superior to the straight debt;The optimal coupon of the convertible debt is less than the optimal coupon of the straight debt,and the optimal coupon of the convertible debt increases at first and decreases later with the increasing of the ratio of the shareholder's encroachment cash flow;Convertible debt reduced the firm's credit risk,which means that firm is less prone to default.Secondly,the paper also considered the investment decisions and agency costs of the firm by using convertible debt financing.Applying the equilibrium pricing principle and dynamic programming method,we obtained the analytical solution of the firm's securities value and real option value and the equations which investmentlevel satisfies.The numerical analysis results found that,convertible debt can increase the controlling shareholder's investment options value,which means the controlling shareholder tends to adopt convertible debt financing.However,all the firm stakeholders tend to adopt straight debt financing because convertible debt will reduce firm value;Convertible debt can alleviate the problem of over-investment,reduce or even eliminate inefficient investment arising by controlling shareholder,and can also reduce the controlling shareholder's agency costs and debt overhang problem.In addition,the existence of the private benefits of control will lead to over-investment behavior or under-investment behavior,and this behavior can be effectively improved by increasing the shareholding ratio of the controlling shareholder or by selecting the optimal conversion ratio of convertible debt.