CEO inside debt and convertible bonds

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.