Does CDS trading affect risk-taking incentives in managerial compensation?

Chen, Jie ORCID: https://orcid.org/0000-0002-4076-7121, Leung, Woon Sau ORCID: https://orcid.org/0000-0002-0389-2126, Song, Wei and Avino, Davide ORCID: https://orcid.org/0000-0002-5314-2067 2023. Does CDS trading affect risk-taking incentives in managerial compensation? Journal of Banking and Finance 151 , 105485. 10.1016/j.jbankfin.2019.01.004

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Abstract

We find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining managerial risk appetite.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HG Finance
Uncontrolled Keywords:	Credit default swaps; Executive compensation; Risk taking; Leverage
Publisher:	Elsevier
ISSN:	0378-4266
Date of First Compliant Deposit:	14 January 2019
Date of Acceptance:	4 January 2019
Last Modified:	17 Nov 2024 09:15
URI:	https://orca.cardiff.ac.uk/id/eprint/118329

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