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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. Copyright (c) 2010 The American Finance Association.

Suggested Citation

  • 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
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