Executive Compensation and the Maturity Structure of Corporate Debt
Journal of Finance, Forthcoming
59 Pages Posted: 28 Sep 2009
Date Written: September 28, 2009
Abstract
Executive compensation influences managerial risk preferences through the executive’s 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 confirm a negative (positive) relation between CEO portfolio deltas (vegas) and short-term debt. We also find that the influence of vega- and delta-related incentives on bond yields is mitigated by short-maturity debt. Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk.
Keywords: Executive compensation, Agency costs, Debt maturity
JEL Classification: G30, G32
Suggested Citation: Suggested Citation
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