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Bankruptcy risk induced by career concerns of regulators

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  • Cole, John A.
  • Cadogan, Godfrey

Abstract

We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm’s capital structure. This can enhance her compensation at the firm, and the value of her contract with the firm in the form of an executive stock option. We prove that the agency cost of this revolving door behavior increases the firm’s financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR).

Suggested Citation

  • Cole, John A. & Cadogan, Godfrey, 2014. "Bankruptcy risk induced by career concerns of regulators," Finance Research Letters, Elsevier, vol. 11(3), pages 259-271.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:3:p:259-271
    DOI: 10.1016/j.frl.2014.02.001
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    Cited by:

    1. Charles-Cadogan, G., 2021. "Market Instability, Investor Sentiment, And Probability Judgment Error in Index Option Prices," CRETA Online Discussion Paper Series 71, Centre for Research in Economic Theory and its Applications CRETA.
    2. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    3. Michael Doumpos & Chrysovalantis Gaganis & Fotios Pasiouras, 2016. "Bank Diversification and Overall Financial Strength: International Evidence," Working Papers 1602, University of Crete, Department of Economics.

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    More about this item

    Keywords

    Career concerns; Revolving door; Managerial compensation; Bankruptcy; Value-at-risk; Human capital;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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