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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27404
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| Title: | Negative Hedging: Performance Sensitive Debt and CEOs’ Equity Incentives |
| Authors: | Tchistyi, Alexei
Yermack, David
Yun, Hayong |
| Keywords: | Performance sensitive debt
equity compensation |
| Issue Date: | 8-Dec-2007 |
| Series/Report no.: | FIN-07-043 |
| Abstract: | We examine the relation between CEOs’ equity incentives and their
use of performance-sensitive debt contracts. These contracts require
higher or lower interest payments when the borrower's performance
deteriorates or improves, thereby increasing expected costs of financial
distress while also making a firm riskier to the benefit of option
holders. We find that managers whose compensation is more sensitive to
stock price volatility choose steeper and more convex performance
pricing schedules, while those with high delta incentives choose
flatter, less convex pricing schedules. Performance pricing contracts
therefore seem to provide a channel for managers to increase
firms’ financial risk to gain private benefits. |
| URI: | http://hdl.handle.net/2451/27404 |
| Appears in Collections: | Finance Working Papers
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