Does Debt Concentration Depend on the Risk-Taking Incentives in CEO Compensation?
57 Pages Posted: 8 Jul 2016 Last revised: 9 Feb 2018
Date Written: February 9, 2018
Coordination problems amongst creditors are reduced when a firm’s debt structure is concentrated in fewer debt types. Using a sample of US non-financial firms, we show that an increase in risk-taking incentives in CEO pay is associated with a greater debt concentration by debt type. This result holds in various settings that account for endogeneity and is primarily driven by pay incentives embedded in vested options that are expected to favor business choices with more immediate negative effects on debtholders’ wealth. Further, our findings are stronger for firms with a higher default risk where coordinated efforts amongst creditors become more pressing. A final test documents that a more concentrated debt structure reduces the negative influence of CEO risk-taking incentives on debtholder wealth thus highlighting the advantages of lower coordination problems amongst creditors.
Keywords: Debt Concentration; Executive Compensation; Asset Substitution; Corporate Governance
JEL Classification: G30, G32 J33, M12
Suggested Citation: Suggested Citation