A large body of the corporate finance literature is devoted to capital structure. This literature examines whether firms have a target capital structure, and whether they actively rebalance their capital structure toward a target. Since conversion of a convertible bond causes a drop in leverage, target capital structure theory suggests that the structure should be rebalanced in the future. I consistently find that following a realized conversion firms rebalance their positions in less than a year. When the stock price passes the conversion price threshold for a convertible bond, the firm expects this drop in leverage to occur in the near future. Using a regression discontinuity design around the conversion price threshold for those conversions that are decided by investors, not by the firm, my paper documents a 20% increase in leverage before an actual drop in leverage. That is to say, firms do not wait for the realization of leverage shocks but rather respond to anticipated shocks. A quantile treatment effect analysis reveals the effect to be a hump-shaped function of leverage, with a peak for firms with a conditional leverage ratio around the 70th percentile.

Abstract We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in credit default swap spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through the “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.