CEO Compensation and Credit Default Swaps: Evidence from the U.S. And Germany

Posted: 5 Oct 2012

See all articles by Hsin-Hui Chiu

Hsin-Hui Chiu

California State University, Northridge

Eva Wagner

Johannes Kepler University Linz - Department of Finance

Date Written: September 1, 2012

Abstract

Executive compensation is designed to create incentives for CEOs to act in the best interest of shareholders. Short-term (bonus) and equity-based incentives induce risk taking behaviors of the CEO that could further change a firm’s risk exposure. This article examines the linkage between compensation components and the impacts on a firm’s credit risk using data from the U.S. and Germany. In the U.S., we find a positive relation between equity-based compensation and credit default swap spreads. Similar positive relation is also found between short-term incentive bonus pay suggesting compensation influece more risk taking for the U.S. firms. However, we do not find significantly positive relation between equity-based incentive and a firm’s credit risk in German firms. Our results seem to indicate that bonus pay is large portion of pay for German CEOs therefore restraint CEOs‘ risk taking strategies.

Keywords: credit default swap (CDS), executive compensation, ownership

JEL Classification: G13, G15, G32, G34

Suggested Citation

Chiu, Hsin-Hui and Wagner, Eva, CEO Compensation and Credit Default Swaps: Evidence from the U.S. And Germany (September 1, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2156092 or http://dx.doi.org/10.2139/ssrn.2156092

Hsin-Hui Chiu

California State University, Northridge ( email )

18111 Nordoff Street
Northridge, CA 91330
United States

Eva Wagner (Contact Author)

Johannes Kepler University Linz - Department of Finance ( email )

Altenbergerstrasse 69
Linz, A4040
Austria

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