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Bankruptcy risk induced by career concerns of regulators

John A. Cole and Godfrey Cadogan

Finance Research Letters, 2014, vol. 11, issue 3, 259-271

Abstract: We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm’s capital structure. This can enhance her compensation at the firm, and the value of her contract with the firm in the form of an executive stock option. We prove that the agency cost of this revolving door behavior increases the firm’s financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR).

Keywords: Career concerns; Revolving door; Managerial compensation; Bankruptcy; Value-at-risk; Human capital (search for similar items in EconPapers)
JEL-codes: C02 G13 G18 G38 J24 (search for similar items in EconPapers)
Date: 2014
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Working Paper: Bankruptcy Risk Induced by Career Concerns of Regulators (2013) Downloads
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Handle: RePEc:eee:finlet:v:11:y:2014:i:3:p:259-271