Credit Default Swaps and CEO Compensation: A Long-Term Perspective

Applied Economics, 2020

Posted: 10 Jul 2020

See all articles by Jong-Yu Paula Hao

Jong-Yu Paula Hao

California State University, Long Beach

Jasmine Yur-Austin

California State University, Long Beach

Lu Zhu

California State University, Long Beach

Date Written: January 1, 2020

Abstract

In this paper, we examine whether the onset of credit default swaps (CDSs) affects a firm’s executive compensation. The availability of CDSs allows lenders to transfer credit risk, but not control or monitoring rights, to CDS sellers. Hence, CDS-protected lenders’ incentives to monitor borrowing firms are curtailed, which could exacerbate the managerial agency problem. To mitigate the concern about the increased agency problem, we postulate that shareholders are more likely to demand greater long-term compensation for CEOs to compensate for their reduced ability to delegate monitoring to CDS-protected lenders. Consistent with our hypothesis, we find a positive CDS-incentive horizon relationship. Moreover, the positive relationship is more pronounced for institutional investors who have stronger incentives for monitoring. This study contributes to the literature by examining the impact of CDSs on executive compensation design, which has been largely overlooked in prior research.

Keywords: credit default swaps, executive compensation, long-term compensation, credit derivatives

JEL Classification: G30, J30, M12

Suggested Citation

Hao, Jong-Yu Paula and Yur-Austin, Jasmine and Zhu, Lu, Credit Default Swaps and CEO Compensation: A Long-Term Perspective (January 1, 2020). Applied Economics, 2020, Available at SSRN: https://ssrn.com/abstract=3629503

Jong-Yu Paula Hao (Contact Author)

California State University, Long Beach

1250 Bellflower Blvd
Long Beach, CA 90064
United States
5629852705 (Phone)

Jasmine Yur-Austin

California State University, Long Beach

1250 Bellflower Blvd
Long Beach, CA 90064
United States

Lu Zhu

California State University, Long Beach

1250 Bellflower Blvd
Long Beach, CA 90064
United States

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