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

Cuadernos de Economía (2015) 38, pp. 54-64

23 Pages Posted: 6 Jan 2019

See all articles by Thomas Walther

Thomas Walther

Utrecht University - School of Economics

Tony Klein

Queen's University Belfast - Queen's Management School

Date Written: September 5, 2014

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

Suggested Citation

Walther, Thomas and Klein, Tony, Contingent Convertible Bonds and its Impact on Risk-Taking of Managers (September 5, 2014). Cuadernos de Economía (2015) 38, pp. 54-64. Available at SSRN: https://ssrn.com/abstract=3305092

Thomas Walther (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

HOME PAGE: http://www.thomas-walther.info

Tony Klein

Queen's University Belfast - Queen's Management School ( email )

Riddel Hall
185 Stranmillis Road
Belfast, BT9 5EE
United Kingdom

HOME PAGE: http://www.tony-klein.info

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