Executive Compensation and the Maturity Structure of Corporate Debt

Publication Year:
2010
Usage 3349
Downloads 3062
Abstract Views 287
Repository URL:
https://digitalcommons.unl.edu/financefacpub/21
Author(s):
Brockman, Paul; Martin, Xiumin; Unlu, Emre
Tags:
Executive compensation; Agency costs; Debt maturity; Finance and Financial Management
article description
Executive compensation influences managerial risk preferences through executives’ portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega). Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking. Theory suggests that short-maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short-maturity debt. We also find that shortmaturity debt mitigates the influence of vega- and delta-related incentives on bond yields. Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk.