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

Does CDS trading affect risk-taking incentives in managerial compensation?
Does CDS trading affect risk-taking incentives in managerial compensation?
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.
0378-4266
Chen, Jie
7181526d-ec25-480e-a35e-37bf4616e131
Leung, Woon Sau
1c82d98c-7cf5-4b3d-a617-b1b083020788
Song, Wei
0d91b8a3-694b-469e-a15e-bba82dc5d090
Avino, Davide
e43d50ab-7e8d-4c64-bff2-c53efcfd2a45
Chen, Jie
7181526d-ec25-480e-a35e-37bf4616e131
Leung, Woon Sau
1c82d98c-7cf5-4b3d-a617-b1b083020788
Song, Wei
0d91b8a3-694b-469e-a15e-bba82dc5d090
Avino, Davide
e43d50ab-7e8d-4c64-bff2-c53efcfd2a45

Chen, Jie, Leung, Woon Sau, Song, Wei and Avino, Davide (2019) Does CDS trading affect risk-taking incentives in managerial compensation? Journal of Banking & Finance, 0, [105485]. (doi:10.1016/j.jbankfin.2019.01.004).

Record type: Article

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.

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Accepted/In Press date: 4 January 2019
e-pub ahead of print date: 7 January 2019
Published date: 7 January 2019

Identifiers

Local EPrints ID: 433992
URI: http://eprints.soton.ac.uk/id/eprint/433992
ISSN: 0378-4266
PURE UUID: 185fc22b-532a-4fef-96ee-1be1cf178b86

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Date deposited: 10 Sep 2019 16:30
Last modified: 28 Apr 2022 05:28

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Contributors

Author: Jie Chen
Author: Woon Sau Leung
Author: Wei Song
Author: Davide Avino

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