Bankruptcy Risk Induced by Career Concerns of Regulators
Financial Research Letters, Forthcoming
23 Pages Posted: 30 Dec 2013 Last revised: 31 Dec 2013
Date Written: December 25, 2013
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: Suggested Citation