For a sample of convertible bonds issued during the period 1980 through 2002, we empirically investigate the determinants of call policy. We find that the risk of a failed call over the call notice period helps explain why firms call only after conversion value exceeds call price by a substantial safety premium. We find strong evidence that cash flow considerations and a desire to mitigate agency conflicts influence call policy. We also find evidence that the decision to issue and subsequently call a convertible bond is influenced by a desire to obtain backdoor equity financing and to finance growth options. There is no evidence, however, that firms with favorable inside information are more likely to delay calls. Finally, we find that a significant portion of calls are associated with restructuring and merger activity, and with bond rating upgrades and downgrades. In these cases, there is little if any call delay.

We examine the effect of CEO pensions and deferred compensation (inside debt) on firm cash holdings and the value of cash. We document a positive relation between CEO inside debt and firm cash holdings. This positive effect is magnified by firm leverage and mitigated by the presence of financial constraints. We further find that the marginal value of cash to shareholders declines as CEO inside debt increases. Our evidence supports the view that inside debt tilts managerial incentives toward bondholders and helps balance the competing interests of stockholders and bondholders. The evidence also suggests, however, that inside debt can harm shareholder value by encouraging excess cash holdings.