Executive compensation and the maturity structure of corporate debt
Date
2010
Authors
Brockman, P.
Martin, X.
Unlu, E.
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Journal article
Citation
The Journal of Finance, 2010; 65(3):1123-1161
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Paul Brockman, Xiumin Martin, and Emre Unlu
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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 short-maturity 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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© 2010 The American Finance Association