Articles

Leverage choice and credit spread when managers risk shift

A. LAZRAK, M. Carlson

The Journal of Finance

décembre 2010, vol. 65, n°6, pp.2323-2362

Départements : Finance

http://ssrn.com/abstract=1343725


We model the debt and asset risk choice of a manager with performance-insensitive pay (cash) and performance-sensitive pay (stock) to theoretically link compensation structure, leverage, and credit spreads. The model predicts that optimal leverage trades off the tax benefit of debt against the utility cost of ex-post asset substitution and that credit spreads are increasing in the ratio of cash-to-stock. Using a large cross-section of U.S.-based corporate credit default swaps (CDS) covering 2001 to 2006, we find a positive association between cash-to-stock and CDS rates, and between cash-to-stock and leverage ratios.


JavaScriptSettings