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

Castro, P.; Keasey, K.; Amor-Tapia, B.; Tascon, M.T.; Vallascas, F.

Abstract

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 empirical settings that account for endogeneity and is in line with the view that a more concentrated debt structure in fewer debt types reduces coordination problems among creditors and the related financial distress costs. Along these lines, we find our results are stronger in riskier firms, in firms with more volatile cash-flows or less stakeholder-orientation and when CEO pay incentives are embedded in vested options that are expected to favor business choices with more immediate negative effects on debtholders' wealth. Overall, our findings are consistent with theoretical models in which the debt structure of a firm acts as a commitment device.

Citation

Castro, P., Keasey, K., Amor-Tapia, B., Tascon, M., & Vallascas, F. (2020). Does Debt Concentration Depend on the Risk-Taking Incentives in CEO Compensation?. Journal of Corporate Finance, 64, Article 101684. https://doi.org/10.1016/j.jcorpfin.2020.101684

• Journal Article Type: Article
• Acceptance Date: Jun 23, 2020
• Online Publication Date: Jun 27, 2020
• Publication Date: 2020-10
• Deposit Date: Jun 24, 2020
• Publicly Available Date: Dec 27, 2021
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 64
• Article Number: 101684
• DOI: https://doi.org/10.1016/j.jcorpfin.2020.101684
• Public URL: https://durham-repository.worktribe.com/output/1267777