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

Chen, Jie; Leung, Sau; Song, Wei; Avino, Davide

doi:10.1016/j.jbankfin.2019.01.004

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

Chen, Jie; Leung, Sau; Song, Wei; Avino, Davide

Authors

Jie Chen

Sau Leung

WEI SONG WEI.SONG@NOTTINGHAM.AC.UK
Associate Professor

Davide Avino

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. JEL classification: G32; G34

Journal Article Type	Article
Acceptance Date	Jan 4, 2019
Online Publication Date	Jan 7, 2019
Publication Date	Jan 7, 2019
Deposit Date	Jul 20, 2021
Publicly Available Date	Jan 8, 2022
Journal	Journal of Banking and Finance
Print ISSN	0378-4266
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Article Number	105485
DOI	https://doi.org/10.1016/j.jbankfin.2019.01.004
Keywords	Credit default swaps; Executive compensation; Risk taking; Leverage
Public URL	https://nottingham-repository.worktribe.com/output/5808972
Publisher URL	https://www.sciencedirect.com/science/article/abs/pii/S0378426619300044