CEO Inside Debt and Convertible Bonds

18 Pages Posted: 8 Feb 2018

See all articles by Wei‐Hsien Li

Wei‐Hsien Li

National Central University at Taiwan

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: January/February 2018

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.

Keywords: convertible bond, inside debt, risk shifting

Suggested Citation

Li, Wei‐Hsien and Rhee, S. Ghon and Shen, Carl Hsin-han, CEO Inside Debt and Convertible Bonds (January/February 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 1-2, pp. 232-249, 2018. Available at SSRN: https://ssrn.com/abstract=3120061 or http://dx.doi.org/10.1111/jbfa.12285

Wei‐Hsien Li (Contact Author)

National Central University at Taiwan

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

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

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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