Dual Ownership and Risk-taking Incentives in Managerial Compensation
56 Pages Posted: 30 Jul 2019 Last revised: 3 Nov 2020
Date Written: July 26, 2019
This paper studies how managerial compensation is shaped by the risk preference of shareholders. Firms with a large ownership held by "dual holders'' -- institutional investors that simultaneously hold equity and bonds of the company -- choose a less risk-inducing compensation structure. Exploiting financial institution mergers that create dual holders for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.
Keywords: Managerial risk-taking, Option-based compensation, Shareholder-creditor conflict, Dual ownership
JEL Classification: G32, G34, J33, M41
Suggested Citation: Suggested Citation