CEO Inside Debt and Convertible Bonds

Forthcoming, Journal of Business Finance & Accounting

43 Pages Posted: 22 Sep 2017

See all articles by Wei-Hsien Li

Wei-Hsien Li

National Central University

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Carl Hsin-han Shen

Macquarie University, Macquarie Business School

Date Written: September 21, 2017

Abstract

The question of 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.

Keywords: Convertible bond; Inside debt; Risk shifting

JEL Classification: G30; M12

Suggested Citation

Li, Wei-Hsien and Rhee, S. Ghon and Shen, Carl Hsin-han, CEO Inside Debt and Convertible Bonds (September 21, 2017). Forthcoming, Journal of Business Finance & Accounting. Available at SSRN: https://ssrn.com/abstract=3041043

Wei-Hsien Li

National Central University ( email )

No.300, Jung-da Rd.
Jhongli, 32001
Taiwan
886-3-422-7151 66128 (Phone)
886-3-425-2961 (Fax)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Carl Hsin-han Shen (Contact Author)

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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