CEO Inside Debt and Convertible Bonds
Journal of Business Finance & Accounting, Vol. 45, Issue 1-2, pp. 232-249, 2018
43 Pages Posted: 6 Sep 2018 Last revised: 16 Sep 2018
Date Written: January 1, 2018
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
JEL Classification: G30, M12
Suggested Citation: Suggested Citation