Credit Ratings And Ceo Risk Taking Incentives
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Credit Ratings And Ceo Risk Taking Incentives
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Author : Yu Flora Kuang
language : en
Publisher:
Release Date : 2017
Credit Ratings And Ceo Risk Taking Incentives written by Yu Flora Kuang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
This study examines the sophistication of rating agencies in incorporating managerial risk-taking incentives into their credit risk evaluation. We measure risk-taking incentives using two proxies: the sensitivity of managerial wealth to stock return volatility (vega) and the sensitivity of managerial wealth to stock price (delta). We find that rating agencies impound managerial risk-taking incentives in their credit risk assessments. Assuming other things equal, a one standard deviation increase in vega (delta) will lead to an approximately one-notch (two-notch) rating downgrade. In addition, we evaluate the significance of credit ratings in the design of CEO compensation. Our findings suggest that rating-troubled firms will gear down managerial incentives of risk-seeking. In particular, other things equal, a rating downgrade to the lower edge of the investment category (i.e., BBB-) in the immediate prior year will bring about an approximately 51 percent reduction of vega incentive from options newly granted to the CEO in the current year. However, we find no evidence that firms' rating concerns significantly affect delta.
Essays On Corporate Risk Governance
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Author : Mr. Gaizka Ormazabal Sanchez
language : en
Publisher: Stanford University
Release Date : 2011
Essays On Corporate Risk Governance written by Mr. Gaizka Ormazabal Sanchez and has been published by Stanford University this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011 with categories.
This dissertation comprises three papers on the governance of corporate risk: 1. The first paper investigates the role of organizational structures aimed at monitoring corporate risk. Proponents of risk-related governance structures, such as risk committees or Enterprise Risk Management (ERM) programs, assert that risk monitoring adds value by ensuring that corporate risks are managed. An alternative view is that such governance structures are nothing more than window-dressing created in response to regulatory or public pressure. Consistent with the former view, I find that, in the period between 2000 and 2006, firms with more observable risk oversight structures exhibit lower equity and credit risk than firms with fewer or no observable risk oversight structures. I also provide evidence that firms with more observable risk oversight structures experienced higher returns during the worst days of the 2007-2008 financial crisis and were less susceptible to market fluctuations than firms with fewer or no observable risk oversight structures. Finally, I find that firms without observable risk oversight structures experienced higher abnormal returns to recent legislative events relating to risk management than firms with observable risk oversight structures. 2. The most common empirical measure of managerial risk-taking incentives is equity portfolio vega (Vega), which is measured as the dollar change in a manager's equity portfolio for a 0.01 change in the standard deviation of stock returns. However, Vega exhibits at least three undesirable features. First, Vega is expressed as a dollar change. This implicitly assumes that managers with identical Vega have the same incentives regardless of differences in their total equity and other wealth. Second, the small change in the standard deviation of returns used to calculate Vega (i.e., 0.01) yields a very local approximation of managerial risk-taking incentives. If an executive's expected payoff is highly nonlinear over the range of potential stock price and volatility outcomes, a local measure of incentives is unlikely to provide a valid assessment of managerial incentives. Third, Vega is measured as the partial derivative of the manager's equity portfolio with respect to return volatility. This computation does not consider that this partial derivative also varies with changes in stock price. The second paper develops and tests a new measure of managerial risk-taking equity incentives that adjusts for differences in managerial wealth, considers more global changes in price and volatility, and explicitly considers the impact of stock price and volatility changes. We find that our new measure exhibits higher explanatory power and is more robust to model specification than Vegafor explaining a wide range of measures of risk-taking behavior. 3. The third paper examines the relation between shareholder monitoring and managerial risk-taking incentives. We develop a stylized model to show that shareholder monitoring mitigates the effect of contractual risk-taking incentives on the manager's actions. Consistent with the model, we find empirically that the positive association between the CEO's contractual risk-taking incentives and risk-taking behavior decreases with the level of shareholder monitoring. Furthermore, consistent with the board anticipating and optimally responding to shareholder monitoring, boards of firms exposed to more intense monitoring design compensation contracts that provide higher incentives to take risks. Overall, our results suggest that, when evaluating risk-taking incentives provided by a compensation contract, it is important to account for the firm's monitoring environment.
Ceo Risk Taking Incentives And Relative Performance Evaluation
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Author : Dirk E. Black
language : en
Publisher:
Release Date : 2018
Ceo Risk Taking Incentives And Relative Performance Evaluation written by Dirk E. Black and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
This paper examines how changes in CEO risk-taking incentives are associated with changes in the use of relative performance evaluation (RPE) in CEO contracts. Using a shock to the accounting for executive stock options (FAS 123R), I confirm that risk-taking incentives and option grants declined following FAS 123R using a within-firm design, but not a within-CEO-firm design. Decreased risk-taking incentives lead executives to invest in projects with lower systematic risk and can result in reduced incentives to hedge exposure to systematic risk in CEO compensation contracts via RPE. However, CEO relative risk-aversion increases with decreases in risk-taking incentives, potentially increasing incentives to protect CEO wealth from systematic performance via RPE. Testing these competing predictions, I find modest evidence consistent with reduced RPE surrounding FAS 123R, suggesting that when CEO risk-taking incentives are reduced, so are incentives to shield CEO pay from systematic performance.
Bank Monitoring And Ceo Risk Taking Incentives
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Author : Anthony Saunders
language : en
Publisher:
Release Date : 2017
Bank Monitoring And Ceo Risk Taking Incentives written by Anthony Saunders and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending relationship with the borrowing firms. Additionally, Vega decreases after financial covenant violations and increases when bank lenders have offsetting equity stakes in borrowing firms. These results together suggest banks have a unique role in monitoring and shaping CEO incentives to mitigate the risk-shifting incentives of firm managers.
The Effect Of Ceo S Risk Taking Incentives On Relationship Specific Investments By Customers And Suppliers
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Author : Jayant R. Kale
language : en
Publisher:
Release Date : 2016
The Effect Of Ceo S Risk Taking Incentives On Relationship Specific Investments By Customers And Suppliers written by Jayant R. Kale and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
A firm's customers and suppliers make relationship-specific investments (RSI) whose value reduces if the firm undertakes risky investments. We hypothesize that the risk-taking incentives in the firm CEO's compensation will lower the RSI by firms up and down in the vertical channel. We provide significant evidence that customer/supplier RSI declines with the risk-taking incentives of the firm's CEO. Moreover, we find that RSI is more sensitive to the CEO's risk-taking incentives when they are more likely to increase the firm's cash flow volatility. Our findings are robust to correcting for endogeneity and several measures for RSI and risk taking.
Ceo Compensation And Credit Default Swaps
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Author : Hsin-Hui Chiu
language : en
Publisher:
Release Date : 2017
Ceo Compensation And Credit Default Swaps written by Hsin-Hui Chiu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
Executive compensation is designed to create incentives for CEOs to act in the best interest of shareholders. Short-term (bonus) and equity-based incentives induce risk taking behaviors of the CEO that could further change a firm's risk exposure. This article examines the linkage between compensation components and the impacts on a firm's credit risk using data from the U.S. and Germany. In the U.S., we find a positive relation between equity-based compensation and credit default swap spreads. Similar positive relation is also found between short-term incentive bonus pay suggesting compensation influece more risk taking for the U.S. firms. However, we do not find significantly positive relation between equity-based incentive and a firm's credit risk in German firms. Our results seem to indicate that bonus pay is large portion of pay for German CEOs therefore restraint CEOs' risk taking strategies.
Leverage Ceo Risk Taking Incentives And Bank Failure During The 2007 2010 Financial Crisis
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Author : Patricia Boyallian
language : en
Publisher:
Release Date : 2017
Leverage Ceo Risk Taking Incentives And Bank Failure During The 2007 2010 Financial Crisis written by Patricia Boyallian and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017 with categories.
Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO's wealth to his firm's stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large U.S. financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007-2010 financial crisis in highly levered firms, but not in less levered firms.
Managerial Risk Taking And Ceo Excess Compensation
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Author : Syed Rahat Ali Jafri
language : en
Publisher:
Release Date : 2013
Managerial Risk Taking And Ceo Excess Compensation written by Syed Rahat Ali Jafri and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with categories.
Government Guarantees And Bank Risk Taking Incentives
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Author : Markus Fischer
language : en
Publisher:
Release Date : 2014
Government Guarantees And Bank Risk Taking Incentives written by Markus Fischer and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
The Influence Of Top Management Characteristics On Corporate Credit Risk Measures
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Author : Elias Fiebig
language : en
Publisher:
Release Date : 2016-08-18
The Influence Of Top Management Characteristics On Corporate Credit Risk Measures written by Elias Fiebig and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-08-18 with categories.
Seminar paper from the year 2016 in the subject Business economics - Business Management, Corporate Governance, grade: A, Copenhagen Business School (Department of Finance), language: English, abstract: Inspired by previous research this paper investigates whether personal CEO characteristics such as age, CEO tenure, gender, MBA and variable salary (%) have a significant effect on firm bankruptcy risk measured using the Altman-Z-Score and the Ohlson-O-Score. This work is based on literature suggesting (i) CEO managerial characteristics such as overconfidence and optimism lead to higher leverage and increased risk-taking and that (ii) higher levels of debt and increased risk-taking behavior add to the likelihood of corporate financial distress. Using panel data on S&P 500 constituents during 1994-2014 our results provide evidence that CEO age and holding an MBA is positively associated with bankruptcy risk while CEO tenure and variable salary (%) seem to be negatively related to a firm's propensity to default. Collectively, our results remain mostly unchanged over various robustness tests employing both pooled OLS and the least squares dummy variable (LSDV) model as well as year, industry and company fixed effects as control variables. Next to significant support that managerial attributes, traits, and style may help to understand organizational outcomes, this project also provides insights how available public information can be used to further explain style effects by disentangling them into separate, measurable impact factors.