Secured Debt and Managerial Incentives

Posted: 5 Jan 2012 Last revised: 5 Jan 2015

See all articles by Michael J. Alderson

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business

Naresh Bansal

Saint Louis University - Department of Finance

Brian L. Betker

Saint Louis University

Date Written: 2014

Abstract

Financial theory holds that firms can control agency costs through the use of short-term and secured debt. We examine the relation between the use of secured debt and the incentive of the manager to increase the risk of the firm, as measured by vega. We find that firms utilize secured debt to a lesser extent when managerial volatility sensitivity is higher. Our results suggest that these same firms employ short-term debt as the primary tool to control risk-shifting. Managers with a high risk appetite avoid secured debt, but appear to do so without compromising the interests of the shareholders.

Keywords: secured debt, managerial incentives, executive compensation, financing policy

JEL Classification: G30, G32

Suggested Citation

Alderson, Michael J. and Bansal, Naresh and Betker, Brian L., Secured Debt and Managerial Incentives (2014). Review of Quantitative Finance and Accounting, October 2014, Volume 43, Issue 3, pp 423-440 , Available at SSRN: https://ssrn.com/abstract=1980057 or http://dx.doi.org/10.2139/ssrn.1980057

Michael J. Alderson

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States
314-977-8169 (Phone)
314-977-3897 (Fax)

Naresh Bansal (Contact Author)

Saint Louis University - Department of Finance ( email )

Richard A. Chaifetz School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Brian L. Betker

Saint Louis University ( email )

St. Louis, MO 63108-3397
United States

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