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.
|Title of host publication||Proceedings of the Academy of Accounting and Financial Studies|
|Place of Publication||Cullowhee, NC|
|Number of pages||5|
|Publication status||Published - 2006|
|Event||Allied Academies International Conference - New Orleans|
Duration: 12 Apr 2006 → 15 Apr 2006
|Conference||Allied Academies International Conference|
|Period||12/04/06 → 15/04/06|
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.