This paper proposes and implements a security design framework to assess why corporate managers issue convertible debt. We examine three theories that make predictions about the design of convertible debt. Our results suggest that some issuers design convertible debt to mitigate asset substitution problems, while others design it to reduce adverse selection problems. We also find that issuers vary convertible debt security design over the business cycle in response to time variation in asset substitution and adverse selection problems. Overall, the results indicate that corporate managers actively alter convertible debt security design to mitigate costly external finance problems. Journal of Economic Literature Classification Number: G32

We study the effects of changes in bid–ask spreads on the prices and trading volumes of stocks that move from Nasdaq to the NYSE or Amex and stocks that move from Amex to Nasdaq. When stocks move from Nasdaq to an exchange, their spreads typically decrease, but the reduction in spreads is larger when Nasdaq market makers avoid odd-eighth quotes. When stocks move from Amex to Nasdaq, their spreads typically increase, but again, the increase is larger when Nasdaq market makers avoid odd eighths. We use this data to isolate the effects of transaction costs on trading volume and expected returns. We find that higher transaction costs significantly reduce trading volume, but do not have a significant effect on prices.Journal of Economic LiteratureClassification Numbers: G10, G14.