Convertible Bonds and the Price Discriminating Monopolist Firm

Abstract

This paper examines whether a price discriminating monopolist will issue convertible bonds with similar features as a perfectly competitive firm. The paper finds that, ceteris paribus, the discriminating monopolist uses relatively more convertible bonds. Also, it designs its convertibles differently with a relatively lower conversion ratio and conversion value as well as neutral hedge ratio. On the other hand, it has a higher breakeven yield and conversion premium. At conversion, the discriminating monopolist has a higher dilution factor. However, after complete market adjustment following conversion, the discriminating monopolist has less outstanding shares.

Keywords: Convertible bonds; Price discriminating monopolist; Market structure.