Direct and indirect risk-taking incentives of inside debt

Stefano Colonnello, Giuliano Curatola and Ngoc Giang Hoang

No 60, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap contracts, we provide evidence supportive of the model's predictions.

Keywords: inside debt; credit spreads; risk-taking (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2016, Revised 2016
New Economics Papers: this item is included in nep-ban and nep-hrm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Direct and indirect risk-taking incentives of inside debt (2017)
Working Paper: Direct and indirect risk-taking incentives of inside debt (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:60

DOI: 10.2139/ssrn.2464430

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