Dual Ownership and Risk-taking Incentives in Managerial Compensation

46 Pages Posted: 30 Jul 2019

See all articles by Tao Chen

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance

Li Zhang

Nanyang Technological University (NTU)

Qifei Zhu

Nanyang Technological University (NTU) - Nanyang Business School

Date Written: July 26, 2019

Abstract

This paper studies how conflicts between equity holders and bond holders affect the design of corporate managerial compensation. Firms with a higher ownership by institutional investors that simultaneously hold equity and bond of the firm ("dual holders") adopt compensation policies with lower risk-taking incentives. Using financial-firm mergers that create dual holders for their portfolio companies as shocks, we identify a causal link between dual ownership and managerial compensation structure. Furthermore, dual holders vote on compensation-related managerial proposals in a way that reduces risk-taking incentives, compared with pure equity holders of the same firm.

Keywords: Managerial risk-taking, Option-based compensation, Shareholder-creditor conflict, Dual ownership

JEL Classification: G32, G34, J33, M41

Suggested Citation

Chen, Tao and Zhang, Li and Zhu, Qifei, Dual Ownership and Risk-taking Incentives in Managerial Compensation (July 26, 2019). Available at SSRN: https://ssrn.com/abstract=3427030 or http://dx.doi.org/10.2139/ssrn.3427030

Tao Chen

Nanyang Technological University (NTU) - Division of Banking & Finance ( email )

S3-B1A-08, Nanyang Avenue
Singapore, 639798
Singapore

Li Zhang

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

Qifei Zhu (Contact Author)

Nanyang Technological University (NTU) - Nanyang Business School ( email )

Singapore, 639798
Singapore

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