Working Paper: CEPR ID: DP15193
Authors: Suleyman Basak; Marti G. Subrahmanyam; Dmitry Makarov; Alex Shapiro
Abstract: This paper provides a status-based explanation for convertible securities. An entrepreneur with status concerns inducing risk-taking decides how to finance the firm and how to dynamically manage it. Solving analytically for the optimal security, we find that it is substantially similar to a convertible security. Our model can explain why convertible securities are mainly issued by start-ups and small firms, as we show that their salient characteristics, higher volatility and dynamic flexibility, accentuate incentives to issue convertible securities. We also provide analytical results relevant to quantifying how status concerns affect credit risk,an established factor behindsecurity choic
Keywords: security design; status concerns; convertible securities; financing; hybrid securities
JEL Codes: G32; C61; G24; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Status concerns (P36) | Risk-taking behavior (D91) |
| Risk-taking behavior (D91) | Security design (F52) |
| Status concerns (P36) | Convertible securities (G12) |
| Firm volatility (G17) | Convertible securities (G12) |
| Status concerns (P36) | Security design (F52) |
| Dynamic flexibility of startups (M13) | (Status concerns -> Convertible securities) (G12) |
| Status concerns + Firm volatility (D22) | Security design (F52) |