Executive Compensation and the Maturity Structure of Corporate Debt

Paul Brockman · Xiumin Martin · Emre Unlu

31 citations0/0 files storedLincoln (University of Nebraska)

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Corporate Finance and Governance Corporate Insolvency and Governance Risk Management in Financial Firms

Abstract

Executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking. Theory suggests that short-maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short-maturity debt. We also find that shortmaturity debt mitigates the influence of vega- and delta-related incentives on bond yields. Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk.

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References

2005Theory of rational option pricing 2001The theory and practice of corporate finance: evidence from the field 1998Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure 2001The Determinants of Credit Spread Changes 1991Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence 1995The Maturity Structure of Corporate Debt 2005The impact of performance-based compensation on misreporting 1995Covenants and Collateral as Incentives to Monitor

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