Direct and indirect risk-taking incentives of inside debt

Arbeitspapier

We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap (CDS) contracts, we provide evidence supportive of the model’s predictions.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IWH Discussion Papers ; No. 20/2016

Classification and Topics

• Classification: Wirtschaft ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
• Subject: inside debt ; credit spreads ; risk-taking

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Colonnello, Stefano ; Curatola, Giuliano ; Ngoc Giang Hoang
• Event: Veröffentlichung
• (who): Leibniz-Institut für Wirtschaftsforschung Halle (IWH)
• (where): Halle (Saale)
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/142256
• URN: urn:nbn:de:gbv:3:2-57815
• Last update: 10.03.2025, 11:41 AM CET