Investment policy and agency problem of convertible debt with sophisticated entrepreneur
LUO Peng-fei
YANG Zhao-jun
Abstract：We assume that entrepreneur is time-inconsistent and sophisticated,but the holder of convertible debt is time-consistent.The investment cost raised by equity and convertible debt.We consider the real investment problem,according to the real options approach,the stochastic optimal control approach and game theory,we explicitly derive the equity value,convertible debt value and option value.This paper examines the impact of time-inconsistent preferences on sophisticated entrepreneur's investment policy,default policy,conversion policy of holder of convertible debt and agency cost between entrepreneur and holder of convertible debt.Our results show that compared to the time-consistent benchmark,time-inconsistent preferences results in entrepreneur's incentive to underinvestment and decreases the option value.The entrepreneur chooses the higher default level,while,the holder of convertible debt chooses the lower conversion level.We find that entrepreneur's interested behaviour with time-inconsistent preferences can mitigate the debt overhang problem of Myers (1977) and the asset substitution problem of Jensen and Meckling (1976).Most of all,the time-inconsistent preferences can eliminate the agency cost between entrepreneur and holder of convertible debt.
Keywords：time-inconsistent preferencessophisticated entrepreneurreal investmentagency cost
Publication Date：2018-01-01
Online Publishing Date：2025-08-15(First online date of this platform, not the publication date of the document)
Pages：8( 349-356 )