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Does CDS trading affect risk-taking incentives in managerial compensation?

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  • Chen, Jie
  • Leung, Woon Sau
  • Song, Wei
  • Avino, Davide

Abstract

We find that managers receive more risk-taking incentives in their compensation packages once their firms are referenced by credit default swap (CDS) trading, particularly when institutional ownership is high and when firms are in financial distress. These findings provide suggestive evidence that boards offer pay packages that encourage greater risk taking to take advantage of the reduced creditor monitoring after CDS introduction. Further, we show that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the threat of exacting creditors restraining managerial risk appetite.

Suggested Citation

  • Chen, Jie & Leung, Woon Sau & Song, Wei & Avino, Davide, 2023. "Does CDS trading affect risk-taking incentives in managerial compensation?," Journal of Banking & Finance, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:jbfina:v:151:y:2023:i:c:s0378426619300044
    DOI: 10.1016/j.jbankfin.2019.01.004
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    More about this item

    Keywords

    Credit default swaps; Executive compensation; Risk taking; Leverage;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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