Bankruptcy Risk Induced by Career Concerns of Regulators

Financial Research Letters, Forthcoming

23 Pages Posted: 30 Dec 2013 Last revised: 31 Dec 2013

See all articles by John A. Cole

John A. Cole

North Carolina Agricultural and Technical State University - School of Business & Economics

G. Charles-Cadogan

University of Leicester; Ryerson University - Institute for Innovation and Technology Management

Date Written: December 25, 2013

Abstract

We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm’s capital structure, in order to enhance the value of her post career change indexed executive stock option contract with the firm. We prove that the agency cost of this revolving door behavior increases the firm’s financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR).

Keywords: career concerns, revolving door, agency cost, managerial compensation, bankruptcy, value-at-risk, human capital

JEL Classification: C02, G13, G18, G38, J24, J44, J45

Suggested Citation

Cole, John A. and Charles-Cadogan, G., Bankruptcy Risk Induced by Career Concerns of Regulators (December 25, 2013). Financial Research Letters, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2372635

John A. Cole (Contact Author)

North Carolina Agricultural and Technical State University - School of Business & Economics ( email )

Merrick Hall
Greensboro, NC 27411
United States

G. Charles-Cadogan

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

Ryerson University - Institute for Innovation and Technology Management ( email )

575 Bay
Toronto, Ontario M5G 2C5
Canada

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