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Conversion Rights and the Design of Financial Contracts

Publication Title

Washington University Law Quarterly

Abstract

Part II of this Article discusses the gains yielded by convertible debt financing. Convertible debt can act as a signal of favorable private information and can mitigate the incentives of shareholders to promote excessive risk taking by the firm. Part III describes puttable stock and the legal regulation that bears on it. The regulation of puttable stock ranges from prohibition to the requirement that the firm be solvent after the exercise of the put. Part IV compares convertible debt and puttable stock. Part V discusses the effect of the mildest form of legal restrictions on puttable stock, the solvency requirement, on these potential gains.

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