Security Design with Status Concerns

54 Pages Posted: 12 Sep 2020

See all articles by Suleyman Basak

Suleyman Basak

London Business School; Centre for Economic Policy Research (CEPR)

Dmitry Makarov

HSE University, International College of Economics and Finance (ICEF)

Alex Shapiro

New York University (NYU) - Department of Finance

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2020

Abstract

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.

Keywords: Convertible Securities, Financing, hybrid securities, security design, Status concerns

JEL Classification: C61, D86, G24, G32

Suggested Citation

Basak, Suleyman and Makarov, Dmitry and Shapiro, Alex and Subrahmanyam, Marti G., Security Design with Status Concerns (August 1, 2020). CEPR Discussion Paper No. DP15193, Available at SSRN: https://ssrn.com/abstract=3688143

Suleyman Basak (Contact Author)

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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HOME PAGE: http://www.suleymanbasak.com

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Dmitry Makarov

HSE University, International College of Economics and Finance (ICEF) ( email )

26 Shabolovka
Moscow
Russia

HOME PAGE: http://www.nes.ru/~dmakarov

Alex Shapiro

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0362 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~ashapiro/

Marti G. Subrahmanyam

New York University (NYU) - Department of Finance ( email )

Stern School of Business,
44 West 4th Street, Suite 9-68
New York, NY 10012-1126
United States
212-998-0348 (Phone)
212-995-4233 (Fax)

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