Credit Default Swaps, Agency Problems, and Management Incentives

Jongsub Lee, Junho Oh and David Yermack

No 24064, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show in a theoretical model that credit default swaps induce managerial agency problems through two channels: reducing the opportunity for managers to transfer value to equityholders from creditors via strategic default, and reducing the intensity of monitoring by creditors, which leads to greater CEO diversion of assets as perquisites. We further show that boards can use compensation awards that increase managerial performance incentives (delta) and risk-taking incentives (vega) in order to mitigate these two agency problems, with increases in managerial vega being particularly useful to alleviate the strategic default-related agency problem. We study equity compensation awards to CEOs of S&P 1500 companies during 2001–2015 and find that they occur in patterns consistent with these predictions.

JEL-codes: G30 G33 G34 J33 M52 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-cfn and nep-hrm
Note: AP CF LE
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Citations: View citations in EconPapers (2)

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