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Journal of Banking & Finance Vol. 151 2023

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

Jie Chen1; Woon Sau Leung2; Wei Song3; Davide Avino4

1 University of Leeds · 2 Cardiff University · 3 Swansea University · 4 University of Liverpool

open access

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.

DOI
10.1016/j.jbankfin.2019.01.004
Volume
151
Pages
105485
Language
en
Sources
openalex crossref semanticscholar

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