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Executive Compensation and the Maturity Structure of Corporate Debt

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  • PAUL BROCKMAN
  • XIUMIN MARTIN
  • EMRE UNLU

Abstract

Executive compensation influences managerial risk preferences through executives' portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk‐taking, while large vegas encourage risk‐taking. Theory suggests that short‐maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short‐maturity debt. We also find that short‐maturity debt mitigates the influence of vega‐ and delta‐related incentives on bond yields. Overall, our empirical evidence shows that short‐term debt mitigates agency costs of debt arising from compensation risk.

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  • Paul Brockman & Xiumin Martin & Emre Unlu, 2010. "Executive Compensation and the Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 65(3), pages 1123-1161, June.
    • Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:1123-1161
    DOI: 10.1111/j.1540-6261.2010.01563.x
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