Managerial Risk-Taking Incentive and Secured Debt: Evidence from REITs

Wei Yuan and Seow Eng Ong ()

ERES from European Real Estate Society (ERES)

Abstract: This study examines the impact of managerial risk-taking attitudes on firmís debt seniority policies. Following Coles, Daniel and Naveen (2006) we viewed higher value of the sensitivity to stock return volatility in managerial compensation (Vega) as indication of managersí tendency to adopt a riskier policy choice. Using sample of US equity REITs during 2001-2009, we found a positive relation between secured debt ratio and Vega implying that risk-taking managers tend to use more secured debt in their capital structure. There are two plausible explanations for this observation. ìFree cash flow hypothesisî posits that high risk-taking managers use more secured debt with purpose to generate more free cash flow to finance their risky projects. ìContracting cost hypothesisî on the other hand argues that increased secured debt helps attenuate the agency cost between shareholders and creditors arising from higher managerial risk-taking incentives.

JEL-codes: R3 (search for similar items in EconPapers)
Date: 2011-01-01
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Persistent link: https://EconPapers.repec.org/RePEc:arz:wpaper:eres2011_338

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