Does CDS Trading Affect Risk-Taking Incentives in Managerial Compensation?

47 Pages Posted: 8 Jan 2019

See all articles by Jie Chen

Jie Chen

Leeds University Business School, University of Leeds

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh

Wei Song

Swansea University - School of Management

Davide E. Avino

University of Liverpool; Financial Mathematics and Computation Cluster

Date Written: January 1, 2019

Abstract

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

Chen, Jie and Leung, Woon Sau and Song, Wei and Avino, Davide E., Does CDS Trading Affect Risk-Taking Incentives in Managerial Compensation? (January 1, 2019). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3310820 or http://dx.doi.org/10.2139/ssrn.3310820

Jie Chen (Contact Author)

Leeds University Business School, University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

HOME PAGE: http://https://business.leeds.ac.uk/about-us/our-people/staff-directory/profile/jie-chen-1/

Woon Sau Leung

The University of Edinburgh Business School, The University of Edinburgh ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Wei Song

Swansea University - School of Management ( email )

Singleton Park
Swansea, Wales SA2 8PP
United Kingdom

Davide E. Avino

University of Liverpool ( email )

Chatham Street
Liverpool, L69 7ZA
United Kingdom

Financial Mathematics and Computation Cluster

Dublin
Ireland

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