Executive Compensation and the Maturity Structure of Corporate Debt

Journal of Finance, Forthcoming

59 Pages Posted: 28 Sep 2009

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Emre Unlu

University of Nebraska at Lincoln

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

Brockman, Paul and Martin, Xiumin and Unlu, Emre, Executive Compensation and the Maturity Structure of Corporate Debt (September 28, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1479629

Paul Brockman (Contact Author)

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

Emre Unlu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

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