Executive Compensation and the Maturity Structure of Corporate Debt
Journal of Finance, Forthcoming
59 Pages Posted: 28 Sep 2009
Date Written: September 28, 2009
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