Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/98747
Authors: 
Colonnello, Stefano
Curatola, Giuliano
Ngoc Giang Hoang
Year of Publication: 
2014
Series/Report no.: 
SAFE Working Paper Series 60
Abstract: 
We develop a model of managerial compensation structure and asset risk choice. The model provides predictions about how inside debt features affect the relation between credit spreads and compensation components. First, inside debt reduces credit spreads only if it is unsecured. Second, inside debt exerts important indirect effects on the role of equity incentives: When inside debt is large and unsecured, equity incentives increase credit spreads; When inside debt is small or secured, this effect is weakened or reversed. We test our model on a sample of U.S. public firms with traded CDS contracts, finding evidence supportive of our predictions. To alleviate endogeneity concerns, we also show that our results are robust to using an instrumental variable approach.
Subjects: 
Compensation Structure
Credit Spread
Risk-Taking
Inside Debt
Business Cycle
JEL: 
G32
G34
J32
J33
M52
Document Type: 
Working Paper

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