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CEO inside debt and convertible bonds
Author(s) -
Li WeiHsien,
Rhee S. Ghon,
Shen Carl Hsinhan
Publication year - 2017
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12285
Subject(s) - convertible bond , debt , incentive , monetary economics , business , bond , debt ratio , financial system , economics , finance , microeconomics
Abstract The question whether convertible bonds are issued to combat the risk‐shifting problem is a subject of debate in the literature, primarily because of the unavailability of clear measures regarding managerial risk‐shifting incentives. Taking advantage of recently developed inside debt‐holding measures for CEOs, we find strong evidence in support of the risk‐shifting hypothesis. When a CEO holds a large amount of inside debt, three distinct patterns emerge: (i) the firm exhibits a lower ratio of outstanding convertibles to total debt; (ii) the firm is less likely to issue convertibles than straight debt; and (iii) the firm devises contract terms to decrease the chance of conversion when it issues convertibles.