CEO Inside Debt and Convertible Bonds
Forthcoming, Journal of Business Finance & Accounting
43 Pages Posted: 22 Sep 2017
Date Written: September 21, 2017
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: Suggested Citation