This Article examines theories supporting the use of convertible secyrutues and finds them insufficient even for public companies, to which they are supposed to apply. They fare worse yet for private firms which use convertibles even more frequently. Indeed, no one theory explains all uses of convertibles. Convertibles can reduce agency costs by reconciling differences in risk aversion and diminishing managers' exploitation of investors, but they can also promote managers' interests at the expense of shareholders. The mix of factors varies from case to case. Thus, the role of convertibles proves complex and diverse. After describing convertible securities (part II) and existing explanations for their use (part III), this Article challenges those explanations for public offerings (part IV), and for private placements by both public (part V) and private firms (part VI). Part VII examines the frequent use of convertible preferred stock ignored by prior studies. Part VIII discusses some implications of the Article's conclusions for future research on capital structure.


Convertible Securities, Corporate Finance

Publication Date


Document Type


Place of Original Publication

Journal of Corporation Law

Publication Information

21 Journal of Corporation Law 241 (1996)


COinS George W. Dent Jr. Faculty Bio