Firms have two motivations for issuing convertible debt. Some issue convertible debt instead of straight debt to mitigate the costs of bondholder/stockholder agency conflicts. Others issue convertible debt instead of common debt to reduce the costs of adverse selection.

Much of the benefit from bank loans is generated by the specialized monitoring and information gathering role provided by financial institutions, including their role in facilitating the reorganization of firms experiencing financial distress. Despite these numerous benefits, it is somewhat...