Does CDS Trading Affect Risk-Taking Incentives in Managerial Compensation?
47 Pages Posted: 8 Jan 2019
Date Written: January 1, 2019
We find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining managerial risk appetite.
Keywords: Credit Default Swaps; Executive Compensation; Risk Taking; Leverage
JEL Classification: G32; G34
Suggested Citation: Suggested Citation