Do hybrid instruments lower the cost of capital?

Guy Ford, Tyrone Carlin, Nigel Finch

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contribution

Abstract

The issue of hybrid instruments by firms is often justified on the grounds that these instruments allow issuers to achieve a lower cost of capital than would be the case under issues of straight debt and equity. In order to assess the validity of such claims it is necessary to examine the economic impact of hybrid instruments on the issuing company. If a firm can genuinely achieve a lower cost of capital than would otherwise be the case with the issue of either straight debt or equity, we argue that this is directly linked to regulatory (reporting) arbitrage, rather than the outcome of financial synergy that arises when debt, equity and option instruments are combined to form a hybrid security. We evaluate the argument that hybrid structures lower the cost of capital from an opportunity cost and risk perspective. We focus our analysis on two main structures: convertible debt and reset preference shares.
Original languageEnglish
Title of host publicationProceedings of the Academy of Accounting and Financial Studies
EditorsJoAnn Carland
Place of PublicationCullowhee, NC
PublisherAllied Academies
Pages31-35
Number of pages5
Publication statusPublished - 2006
EventAllied Academies International Conference - New Orleans
Duration: 12 Apr 200615 Apr 2006

Conference

ConferenceAllied Academies International Conference
CityNew Orleans
Period12/04/0615/04/06

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  • Cite this

    Ford, G., Carlin, T., & Finch, N. (2006). Do hybrid instruments lower the cost of capital? In J. Carland (Ed.), Proceedings of the Academy of Accounting and Financial Studies (pp. 31-35). Cullowhee, NC: Allied Academies.