Does Debt Concentration Depend on the Risk-Taking Incentives in CEO Compensation?

57 Pages Posted: 8 Jul 2016 Last revised: 9 Feb 2018

See all articles by Paula Castro

Paula Castro

Universidad de León

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Borja Amor-Tapia

Universidad de León

Maria T. Tascón

Universidad de León

Francesco Vallascas

Durham University; University of Leeds - Faculty of Business

Date Written: February 9, 2018

Abstract

Coordination problems amongst creditors are reduced when a firm’s debt structure is concentrated in fewer debt types. 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 settings that account for endogeneity and is primarily driven by pay incentives embedded in vested options that are expected to favor business choices with more immediate negative effects on debtholders’ wealth. Further, our findings are stronger for firms with a higher default risk where coordinated efforts amongst creditors become more pressing. A final test documents that a more concentrated debt structure reduces the negative influence of CEO risk-taking incentives on debtholder wealth thus highlighting the advantages of lower coordination problems amongst creditors.

Keywords: Debt Concentration; Executive Compensation; Asset Substitution; Corporate Governance

JEL Classification: G30, G32 J33, M12

Suggested Citation

Castro, Paula and Keasey, Kevin and Amor-Tapia, Borja and Tascon, Maria Teresa and Vallascas, Francesco, Does Debt Concentration Depend on the Risk-Taking Incentives in CEO Compensation? (February 9, 2018). Available at SSRN: https://ssrn.com/abstract=2805004 or http://dx.doi.org/10.2139/ssrn.2805004

Paula Castro

Universidad de León ( email )

Leon, 24071
Spain

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Borja Amor-Tapia

Universidad de León ( email )

Leon, 24071
Spain
(+34) 987291000 (Phone)

Maria Teresa Tascon

Universidad de León ( email )

Leon, 24071
Spain

Francesco Vallascas (Contact Author)

Durham University ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

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