Direct and indirect risk-taking incentives of inside debt

Stefano Colonnello, Giuliano Curatola and Ngoc Giang Hoang

No 20/2016, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about the relation between credit spreads and different compensation components. First, we show that credit spreads are decreasing in inside debt only if it is unsecured. Second, the relation between credit spreads and equity incentives varies depending on the features of inside debt. We show that credit spreads are increasing in equity incentives. This relation becomes stronger as the seniority of inside debt increases. Using a sample of U.S. public firms with traded credit default swap (CDS) contracts, we provide evidence supportive of the model’s predictions.

Keywords: inside debt; credit spreads; risk-taking (search for similar items in EconPapers)
JEL-codes: G32 G34 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Journal Article: Direct and indirect risk-taking incentives of inside debt (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-20-16

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