Convertibles in Sequential Financing

Sequential financing is a popular strategy in corporate finance. However, depending on the type of financial instrument used to carry out the strategy, sequential financing can have many potential problems. This paper shows that certain types of convertibles can be deployed to resolve the problems completely. This may explain why convertibles are widely adopted to implement sequential financing in reality, especially among companies with many real options. We find that the call feature and some popular call restrictions are necessary for an efficient convertible. Indeed, almost all real-world convertibles have a call feature and call restrictions.