Security design with status concerns

Basak, S, Makarov, D, Shapiro, A and Subrahmanyam, M (2020) Security design with status concerns. Journal of Economic Dynamics and Control, 118 (Sept). p. 103976. ISSN 0165-1889 OPEN ACCESS


This paper provides a status-based explanation for convertible securities. An entrepreneur with status concerns inducing risk-taking decides how to finance the firm and how to dynamically manage it. Solving analytically for the optimal security, we find that it is substantially similar to a convertible security. Our model can explain why convertible securities are mainly issued by start-ups and small firms, as we show that their salient characteristics, higher volatility and dynamic flexibility, accentuate incentives to issue convertible securities. We also provide analytical results relevant to quantifying how status concerns affect credit risk, an established factor behind security choice

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Item Type: Article
Subject Areas: Finance
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© 2020 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 licence

Date Deposited: 28 Aug 2020 16:51
Date of first compliant deposit: 21 Aug 2020
Subjects: Securities
Last Modified: 23 Aug 2022 06:08

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