We study the relation between product market competition and convertible debt financing. Competitive threats motivate firms to use convertible debt because the possibility of future conversion enhances financial flexibility. Consistent with this intuition, we find that the intensity of competitive threats is positively associated with convertible debt usage, at both the extensive and intensive margins. We further confirm our findings by using large tariff reductions as an
exogenous shock to competition. When competitive threats rise, convertible debt issuers increase the probability of future conversion by including shorter call protection periods and tailoring a higher conversion sensitivity to stock performance.