Executive Compensation and the Maturity Structure of Corporate Debt

Executive compensation influences managerial risk preferences through the executive’s 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. By altering the incentives for risk-seeking behavior, executive compensation can affect agency costs of debt. Theory posits that short-maturity debt can mitigate agency costs of debt by constraining managerial risk preferences. We posit and confirm a negative relation between CEO portfolio deltas and short-term debt, and a positive relation between CEO portfolio vegas and short-term debt. We also find that the influence of vega- and delta-related incentives on bond yields is mitigated by short-maturity debt. Overall, our empirical evidence suggests that short-term debt mitigates agency costs of debt arising from managerial compensation risk.

Publication Information
Article Title: Executive Compensation and the Maturity Structure of Corporate Debt
Journal: Journal of Finance (Jun, 2010)
Author(s): Brockman, Paul;  Martin, Xuimin;  Unlu, Emre
Researcher Information
Unlu, Emre
Unlu, Emre
Executive Director of Executive Education
  • Corporate Finance
CoB 201 H
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2353