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

Jie Chen, Woon Sau Leung, Wei Song and Davide Avino

Journal of Banking & Finance, 2023, vol. 151, issue C

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 when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining 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)
Date: 2023
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:eee:jbfina:v:151:y:2023:i:c:s0378426619300044

DOI: 10.1016/j.jbankfin.2019.01.004

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