Credit default swaps and CEO compensation: a long-term perspective

Jong-Yu Paula Hao, Jasmine Yur-Austin and Lu Zhu

Applied Economics, 2020, vol. 52, issue 35, 3770-3787

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.

Date: 2020
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2020.1722793 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:52:y:2020:i:35:p:3770-3787

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2020.1722793

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().