Callable convertible debt under managerial entrenchment

This paper provides an explanation of callable convertible issue from the viewpoint of managerial entrenchment. Zweibel [American Economic Review 86 (1996)] has shown that an entrenched manager voluntarily issues straight debt in order to avoid hostile takeover. Straight debt, however, may lead the firm into bankruptcy in which a manager loses her position. We show that an entrenched manager can avoid a hostile takeover and bankruptcy at the same time by issuing well-designed callable convertible debt. Although callable convertible debt may decrease the value of the firm, an entrenched manager will prefer it over straight debt. (C) 2002 Elsevier Science B.V. All rights reserved.