Internationalization enables multinational corporations (MNCs) to diversify their sources and types of debt, as well as earnings, although doing so can negatively impact firm risk and the agency costs of debt. Utilizing a primary sample of United States (US) based MNCs compared with domestic corporations (DCs), we find that MNCs are indeed riskier than DCs when considering systematic risk. Further, recognizing the heterogeneity of long-term debt, we find these MNCs consistently maintain a higher convertible debt ratio compared to DCs. We argue this is to mitigate the agency costs related to the asset substitution problem.

Convertible bonds are an important segment of the corporate bond market although their pricing is compromised by the presence of complex option features and difficulty in measuring the risk factors needed as inputs to standard valuation models. Using a unique sample of pure U.S. convertible bonds, devoid of other optionality, we show that underpricing is affected mainly by the degree of underlying asset volatility and liquidity. Convertible bonds with a greater debt component (more credit sensitive), longer time to maturity and lower quality credit ratings are also found to be more underpriced. The global financial crisis (GFC) is an episode with high-underlying asset volatility and one subject to short-selling constraints. During this period there was deep convertible bond discounting, which highlights the importance of market conditions and the temporal, rather than systematic, nature of the pricing errors.