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Contingent convertible bonds and their impact on risk-taking of managers

Author

Listed:
  • Thomas Walther

    (Chair of Finance and Financial Services, Faculty of Business and Economics, Technische Universität Dresden, 01062 Dresden, Germany)

  • Tony Klein

    (Chair of Finance and Financial Services, Faculty of Business and Economics, Technische Universität Dresden, 01062 Dresden, Germany)

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 company assets sets incentives to managers to increase risk, if it is not adjusted to the compensation system. However, if the remuneration of managers is adjusted simultaneously with the issuance, e.g. with internal debt, the drawbacks of the sole compensation with stock options can be equalised. Furthermore, it was found that CCB does have an impact on the risk-taking behaviour, while CCB does not change the incentive to increase the company value at all.

Suggested Citation

  • Thomas Walther & Tony Klein, 2015. "Contingent convertible bonds and their impact on risk-taking of managers," Cuadernos de Economía - Spanish Journal of Economics and Finance, Asociación Cuadernos de Economía, vol. 38(106), pages 54-64, Abril.
    • Handle: RePEc:cud:journl:v:38:y:2015:i:106:p:54-64
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    Citations

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    Cited by:

    1. Raviv, Alon & Hilscher, Jens & Peleg Lazar, Sharon, 2021. "Designing bankers' pay: Using contingent capital to reduce risk-shifting," MPRA Paper 106596, University Library of Munich, Germany.
    2. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    3. Xiaolin Wang & Zhaojun Yang & Pingping Zeng, 2023. "Pricing contingent convertibles with idiosyncratic risk," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 660-693, September.
    4. Song Jiaxin, 2023. "Announcement Effect Study of Issuing Tier 2 Capital Bonds on the Stock Price of China Construction Bank," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 13(6), pages 1-4.

    More about this item

    Keywords

    Contingent convertible bonds. Executive compensation. Incentives. Inside debt. Risk-taking.;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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