Abstract

http://ssrn.com/abstract=1300782
 
 

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Negative Hedging: Performance Sensitive Debt and CEOs' Equity Incentives


Alexei Tchistyi


Haas School of Business, UC Berkeley

David Yermack


New York University (NYU) - Stern School of Business

Hayong Yun


Michigan State University - Department of Finance

September 18, 2009

NYU Working Paper No. FIN-07-043

Abstract:     
We examine the relation between CEOs equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distresswhile also making a firm riskier to the benefit of option holders. We find that managers whose compensation is more sensitive to stock price volatility choose steeper and more convex performance pricing schedules, while those with high delta incentives choose flatter, less convex pricing schedules. Performance pricing contracts therefore seem to provide a channel for managers to increase firms financial risk to gain private benefits.

Number of Pages in PDF File: 54

Keywords: Performance sensitive debt, equity compensation

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Date posted: November 13, 2008 ; Last revised: September 23, 2009

Suggested Citation

Tchistyi, Alexei and Yermack, David and Yun, Hayong, Negative Hedging: Performance Sensitive Debt and CEOs' Equity Incentives (September 18, 2009). NYU Working Paper No. FIN-07-043. Available at SSRN: http://ssrn.com/abstract=1300782

Contact Information

Alexei Tchistyi (Contact Author)
Haas School of Business, UC Berkeley ( email )
F602 Haas School of Business
University of California
Berkeley, CA 94720
United States
David Yermack
New York University (NYU) - Stern School of Business ( email )
44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://www.stern.nyu.edu/~dyermack
Hayong Yun
Michigan State University - Department of Finance ( email )
645 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)
HOME PAGE: http://https://sites.google.com/site/hayongy/
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