Convertible debt and shareholder incentives |
| |
| Institution: | 1. Department of Mathematics, Zhejiang University, 38 Zheda Road, Hangzhou 310027, China;2. College of Economics and Academy of Financial Research, Zhejiang University, 38 Zheda Road, Hangzhou 310027, China;1. The School of Management, University of Science and Technology of China, Hefei, 230026 China;2. Lingnan (University) College, Sun Yat-sen University, Guagnzhou, 510275 China;3. School of Economics and Management, Shanxi University, Taiyuan, 030006 China;1. School of Business Administration, Oakland University, 2200 North Squirrel Road, Rochester, MI 48309-4401, USA;2. School of Management, The University of Michigan-Flint, 303 E. Kearsley Street, Flint, MI 48502, USA;3. School of Business, Ithaca College, 953 Danby Road, Ithaca, NY 14850, USA;1. Business School, Hunan University, Changsha 410082, China;2. Center for Finance and Investment Management, Hunan University, Changsha 410082, China;1. School of Economics, Finance and Banking, College of Business, Universiti Utara Malaysia, 06010 UUM Sintok, Kedah, Malaysia;2. Department of Finance and Banking, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur 50603, Malaysia;3. School of Economics and Finance, Massey Business School, Massey University, New Zealand. |
| |
| Abstract: | Given equity's convex payoff function, shareholders can transfer wealth from bondholders by increasing firm risk. We test the existing hypothesis that convertible debt reduces this classical agency problem of risk-shifting. First, we derive a measure of shareholders' risk incentives induced by convertible debt using a contingent claims framework. We then document that when risk-shifting incentives are high, the propensity to issue convertible (rather than straight) debt increases and the negative stock market reaction following convertible debt issue announcements is amplified. We further highlight that convertible debt is the only type of security that affects business risk durably downwards. Our conclusions support the agency theoretic rationale for convertible debt financing especially for financially distressed firms. |
| |
| Keywords: | |
| 本文献已被 ScienceDirect 等数据库收录！ |
|
