Article ID Journal Published Year Pages File Type
983301 The Quarterly Review of Economics and Finance 2009 11 Pages PDF
Abstract

Simulation and option pricing techniques are used to value the marginal effect of asset risk on stock value. I find the optimal mix of stock, debt and convertible bonds that reduces this marginal effect to zero. At this optimal point the agency costs of debt are minimized. The incentive to add risky projects that arises from ordinary debt is offset by the incentive to ignore risky projects that arises from convertible debt.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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