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Credit default swaps, agency problems, and management incentives

Author: Jongsub Lee; Junho Oh; David L Yermack; National Bureau of Economic Research,
Publisher: Cambridge, Mass. : National Bureau of Economic Research, 2017.
Series: Working paper series (National Bureau of Economic Research), no. 24064.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Summary:
We show in a theoretical model that credit default swaps induce managerial agency problems through two channels: reducing the opportunity for managers to transfer value to equityholders from creditors via strategic default, and reducing the intensity of monitoring by creditors, which leads to greater CEO diversion of assets as perquisites. We further show that boards can use compensation awards that increase  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jongsub Lee; Junho Oh; David L Yermack; National Bureau of Economic Research,
OCLC Number: 1014027650
Notes: "November 2017."
Description: 1 online resource (41 pages) : illustrations
Series Title: Working paper series (National Bureau of Economic Research), no. 24064.
Responsibility: Jongsub Lee, Junho Oh, David Yermack.

Abstract:

We show in a theoretical model that credit default swaps induce managerial agency problems through two channels: reducing the opportunity for managers to transfer value to equityholders from creditors via strategic default, and reducing the intensity of monitoring by creditors, which leads to greater CEO diversion of assets as perquisites. We further show that boards can use compensation awards that increase managerial performance incentives (delta) and risk-taking incentives (vega) in order to mitigate these two agency problems, with increases in managerial vega being particularly useful to alleviate the strategic default-related agency problem. We study equity compensation awards to CEOs of S & P 1500 companies during 2001-2015 and find that they occur in patterns consistent with these predictions.

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