Executive Equity Risk-Taking Incentives and Firm's Choice of Debt Structure

58 Pages Posted: 19 Oct 2017 Last revised: 16 Sep 2018

See all articles by Yangyang Chen

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business

Iftekhar Hasan

Fordham University - Gabelli School of Business; Bank of Finland

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Leon Zolotoy

University of Melbourne - Melbourne Business School

Date Written: September 6, 2018

Abstract

We examine the impact of executive equity risk-taking incentives on U.S. firms’ choices of debt structure. Firms with higher sensitivity of executive compensation to stock volatility (vega) rely less on bank debt and more on public debt. The effect of vega is amplified for firms with greater asset substitution risk and more opaque financial information, while mitigated for firms with less scope to increase equity risk. Multiple identification tests confirm causality. We conclude that, by encouraging risk-taking, higher vega increases firms’ reliance on public debt in order to avoid more stringent bank monitoring.

Keywords: Executive equity incentives; Vega; Bank debt; Public debt

JEL Classification: G21, G32, J33, J41

Suggested Citation

Chen, Yangyang and Hasan, Iftekhar and Saffar, Walid and Zolotoy, Leon, Executive Equity Risk-Taking Incentives and Firm's Choice of Debt Structure (September 6, 2018). Available at SSRN: https://ssrn.com/abstract=3055467 or http://dx.doi.org/10.2139/ssrn.3055467

Yangyang Chen

Hong Kong Polytechnic University - Faculty of Business ( email )

9/F, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Iftekhar Hasan

Fordham University - Gabelli School of Business ( email )

Rose Hill Campus Bronx
New York, NY 10458
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Walid Saffar (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

Leon Zolotoy

University of Melbourne - Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053 3186
Australia

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