Direct and Indirect Risk-Taking Incentives of Inside Debt

SAFE Working Paper No. 60

64 Pages Posted: 10 Jul 2014 Last revised: 20 Jul 2016

See all articles by Stefano Colonnello

Stefano Colonnello

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Giuliano Curatola

University of Siena - Department of Economics and Statistics; Goethe University Frankfurt - Research Center SAFE

Ngoc Giang Hoang

Utrecht University School of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: July 16, 2016

Abstract

We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap contracts, we provide evidence supportive of the model’s predictions.

Keywords: Inside Debt, Credit Spreads, Risk-Taking

JEL Classification: G32, G34

Suggested Citation

Colonnello, Stefano and Curatola, Giuliano and Hoang, Ngoc Giang, Direct and Indirect Risk-Taking Incentives of Inside Debt (July 16, 2016). SAFE Working Paper No. 60. Available at SSRN: https://ssrn.com/abstract=2464430 or http://dx.doi.org/10.2139/ssrn.2464430

Stefano Colonnello

Otto-von-Guericke-Universität Magdeburg

Universitaetsplatz 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Giuliano Curatola (Contact Author)

University of Siena - Department of Economics and Statistics ( email )

Piazza San Francesco 7
Siena, Siena 53100
Italy

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Ngoc Giang Hoang

Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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