Managerial equity incentives and anti-dilutive convertible debt decisions
Review of Accounting and Finance
ISSN: 1475-7702
Article publication date: 14 August 2018
Issue publication date: 3 September 2018
Abstract
Purpose
This paper aims to examine whether high equity incentives motivate executives to avoid issuing convertible debt and/or to design convertible debt issues as anti-dilutive to earnings-per-share (EPS).
Design/methodology/approach
Tests are conducted using the Heckman two-step probit model to control for potential self-selection bias between firms that issue straight debt and those that issue convertible debt. Further, analyses are conducted separately and jointly for the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) to assess the differential impact of CEOs’ and CFOs’ equity incentives on convertible debt issuance and design decisions.
Findings
Firms are more likely to design convertible debt issues as anti-dilutive to EPS when CFOs have high levels of equity incentives, but only when the firm stock price is sensitive to diluted EPS. High CEOs’ equity incentives have limited impact of convertible debt issuance and design decisions.
Research limitations/implications
The main limitation of this study is the generalizability of the findings and implications of this study due to the smaller sample size of convertible debt issues.
Originality/value
Prior research has shown that bonus incentives influence CEOs with disincentive for EPS dilution and motivate them to make anti-dilutive financing decisions. Further, there is evidence that high equity incentives motivate CEOs to manage earnings to boost short-term prices. This study extends prior literature by showing that high equity incentives provide executives with disincentive for EPS dilution and motivate CFOs to design convertible debt issues as anti-dilutive to EPS possibly to avoid reduced stock prices. Further, this study shows that CFOs have greater influence over convertible debt design choices than CEOs do.
Keywords
Acknowledgements
This paper is derived from my doctoral dissertation at the University of Texas San Antonio. I want to extend my warmest thanks to my committee, Dr Emeka Nwaeze (Chair), Dr Sharad Asthana, Dr Jeff Boone, Dr Jennifer Yin, and Dr Donald Lien. I appreciate all of your time and efforts on my behalf during this process. I would also like to thank all other faculty who have assisted, coached, and advised me through the doctoral program, especially Dr James Groff. Finally, I wish to thank my fellow classmates who have provided me encouragements and support throughout the journey and particularly Wael Aguir, Linda Campbell, Casey Martin, Rachana Kalekar, April Poe, Linxiao Liu, Sarfraz Khan, Sung-Jing Park, and Riya Xu.
Citation
Akono, H. (2018), "Managerial equity incentives and anti-dilutive convertible debt decisions", Review of Accounting and Finance, Vol. 17 No. 3, pp. 341-358. https://doi.org/10.1108/RAF-12-2016-0201
Publisher
:Emerald Publishing Limited
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