Dual Ownership and Risk-taking Incentives in Managerial Compensation
46 Pages Posted: 30 Jul 2019
Date Written: July 26, 2019
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
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