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Executive Compensation and the Maturity Structure of Corporate Debt

Authors

  • PAUL BROCKMAN,

  • XIUMIN MARTIN,

  • EMRE UNLU

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    • Lehigh University, Washington University, and University of Nebraska. The authors thank an anonymous referee and associate editor, the editor (Campbell R. Harvey), and co-editor (John R. Graham) for their suggestions and comments during the revision process. The authors also thank Mary McGarvey, James Schmidt, and seminar participants at Washington University, University of Missouri, Texas Christian University, and University of Texas-Dallas for their comments.


ABSTRACT

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 short-maturity 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.

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