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CONVERTIBLE DEBT AND RISK‐SHIFTING INCENTIVES
Author(s) -
Eisdorfer Assaf
Publication year - 2009
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2009.01256.x
Subject(s) - convertible bond , leverage (statistics) , capital structure , incentive , debt , business , convertible , asset (computer security) , shareholder , financial economics , economics , monetary economics , finance , microeconomics , corporate governance , computer security , structural engineering , machine learning , computer science , engineering
I argue that convertible debt, in contrast to its perceived role, can produce shareholders’ risk‐shifting incentives. When a firm's capital structure includes convertible debt, every investment decision affects not only the distribution of the asset value but also the likelihood that the debt will be converted and thereby the distribution of the firm's leverage. This suggests that managers can engage in risk‐increasing projects if a higher asset risk generates a more favorable distribution of leverage. Empirical evidence using 30 years of data supports my argument.