Mandatory Convertible

Mandatory Convertible - Mandatory Convertible is the equity-linked hybrid security that automatically converts to common stock on a pre-specified date. They have become an increasingly popular means of raising capital. A firm facing a financial market we consider characterized by asymmetric information, and significant costs in the event of financial distress. The firm raises capital by issuing mandatory convertibles, or by issuing more conventional securities like straight debt, common stock, and ordinary convertibles. The probability of being distressed financially is relatively small; it issues mandatory convertibles if it faces a smaller extent of the asymmetric information, but a greater probability of financial distress.