Executive Compensation and the Maturity Structure of Corporate Debt

Authors

Paul Brockman, Lehigh UniversityFollow
Xiumin Martin, Washington UniversityFollow
Emre Unlu, University of Nebraska-LincolnFollow

Date of this Version

2010

Comments

Forthcoming in THE JOURNAL OF FINANCE. Copyright 2010 PAUL BROCKMAN, XIUMIN MARTIN, and EMRE UNLU.

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 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.