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Review of Finance Advance Access originally published online on September 18, 2008
Review of Finance 2009 13(4):727-760; doi:10.1093/rof/rfn024
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© The Author 2008. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Convertibles in Sequential Financing*

Susheng Wang

Hong Kong University of Science and Technology

Sequential financing is a popular strategy in corporate finance. However, depending on the type of financial instrument used to carry out the strategy, sequential financing can have many potential problems. This paper shows that certain types of convertibles can be deployed to resolve the problems completely. This may explain why convertibles are widely adopted to implement sequential financing in reality, especially among companies with many real options. We find that the call feature and some popular call restrictions are necessary for an efficient convertible. Indeed, almost all real-world convertibles have a call feature and call restrictions.

JEL Classification: G31, G32

* The refereeing process resulted in a major improvement to the paper and the input from two anonymous referees and Editor Marco Pagano is gratefully acknowledged. All errors are mine.


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