Contingent Convertible Bonds and its Impact on Risk-Taking of Managers

Abstract

This paper discusses how Contingent Convertible Bonds (CCB) influence the risk-taking behaviour of managers. A methodology to measure the impact is presented. The results show that the decision of issuing CCB to finance the firm’s assets sets incentives to managers to increase risk, in case the compensation is not adjusted. However, if the remuneration of managers is adjusted simultaneously with the issuance, e. g. with inside debt, the drawbacks of the sole compensation with stock options can be equalised. Furthermore, we found that CCB do have an impact on the risk-taking behaviour, while CCB do not change the incentive to increase the firm value at all.

Keywords: Contingent Convertible Bonds; executive compensation; incentives; inside debt; risk-taking

JEL Classification: G20, G21, G28, G34, J31