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Are banks happy when managers go long? The information content of managers’ vested option holdings for loan pricing

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  • Dezső, Cristian L.
  • Ross, David Gaddis
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    Abstract

    While traditional finance theory holds that managers with option-laden incentive contracts may favor equity at the expense of debt, a risk-averse manager may be more likely to retain vested in-the-money options if the manager has private information that the firm's risk-adjusted performance will be better. It follows that vested option holdings should be positively associated with credit quality. In support of this, we find that vested option holdings have a strong negative association with loan pricing, especially for informationally sensitive loans, and also predict higher cash flows and credit ratings, a greater distance to default, and lower equity volatility.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 2 ()
    Pages: 395-410

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:395-410

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Credit quality; Executive compensation; Loan pricing; Options; Volatility;

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