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

Author

Listed:
  • Jie Chen

    (Cardiff Business School, Cardiff University)

  • Woon Sau Leung

    (Cardiff Business School, Cardiff University)

  • Wei Song

    () (School of Management, Swansea University)

  • Davide Avino

    (Cardiff Business School, Cardiff University)

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 in firms with bank debt, greater institutional holdings, and in financial distress. These findings suggest that boards offer pay packages that encourage greater managerial risk taking to take advantage of the reduced creditor monitoring after CDS trade initiation. Further, we find that the onset of CDS trading attenuates the effect of vega on leverage, consistent with the view that the threat of exacting creditors restrains managerial risk appetite.

Suggested Citation

  • Jie Chen & Woon Sau Leung & Wei Song & Davide Avino, 2018. "Does CDS trading affect risk-taking incentives in managerial compensation?," Working Papers 2018-19, Swansea University, School of Management.
  • Handle: RePEc:swn:wpaper:2018-19
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    Keywords

    Credit default swaps; Executive compensation; Risk taking; Leverage;

    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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