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

See all articles by Wei-Hsien Li

Wei-Hsien Li

National Central University at Taiwan - Department of Finance

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 1, 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

JEL Classification: G30, M12

Suggested Citation

Li, Wei-Hsien and Rhee, S. Ghon and Shen, Carl Hsin-han, CEO Inside Debt and Convertible Bonds (January 1, 2018). Journal of Business Finance & Accounting, Vol. 45, Issue 1-2, pp. 232-249, 2018. Available at SSRN: https://ssrn.com/abstract=3239588

Wei-Hsien Li

National Central University at Taiwan - Department of Finance ( email )

No. 300, Jung-da Rd.
Jung-Li
Taoyuan
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 (Contact Author)

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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