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Does debt concentration depend on the risk-taking incentives in CEO compensation?

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  • Castro, Paula
  • Keasey, Kevin
  • Amor-Tapia, Borja
  • Tascon, Maria T.
  • Vallascas, Francesco

Abstract

Using a sample of US non-financial firms we show that an increase in risk-taking incentives in CEO pay is associated with a greater debt concentration by debt type. This result holds in various empirical settings that account for endogeneity and is in line with the view that a more concentrated debt structure in fewer debt types reduces coordination problems among creditors and the related financial distress costs. Along these lines, we find our results are stronger in riskier firms, in firms with more volatile cash-flows or less stakeholder-orientation and when CEO pay incentives are embedded in vested options that are expected to favor business choices with more immediate negative effects on debtholders' wealth. Overall, our findings are consistent with theoretical models in which the debt structure of a firm acts as a commitment device.

Suggested Citation

  • Castro, Paula & Keasey, Kevin & Amor-Tapia, Borja & Tascon, Maria T. & Vallascas, Francesco, 2020. "Does debt concentration depend on the risk-taking incentives in CEO compensation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    • Handle: RePEc:eee:corfin:v:64:y:2020:i:c:s0929119920301280
    DOI: 10.1016/j.jcorpfin.2020.101684
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    More about this item

    Keywords

    Debt concentration; Executive compensation; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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