Does CDS trading affect risk-taking incentives in managerial compensation?

Jie Chen, Woon Sau Leung, Wei Song () and Davide Avino
Additional contact information
Jie Chen: Cardiff Business School, Cardiff University
Woon Sau Leung: Cardiff Business School, Cardiff University
Wei Song: School of Management, Swansea University

No 2018-19, Working Papers from Swansea University, School of Management

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 in firms with bank debt, greater institutional holdings, and in financial distress. These findings suggest that boards offer pay packages that encourage greater managerial risk taking to take advantage of the reduced creditor monitoring after CDS trade initiation. Further, we find that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the view that the threat of exacting creditors restrains managerial risk appetite.

Keywords: Credit default swaps; Executive compensation; Risk taking; Leverage (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2018-02-24
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:swn:wpaper:2018-19

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