Lender Monitoring and the Efficacy of Managerial Risk-Taking Incentives

• 成果类型: Article
• 署名作者: Hong, Hyun A.; Ryou, Ji Woo; Srivastava, Anup
• 署名单位: University of California System; University of California Riverside; West Virginia University; University of Calgary
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/TAR-2018-0139
• 发表日期: 2021
• 页码: 315-339
• 关键词: Credit default swaps; ceo compensation; financial intermediation; executive-compensation; information asymmetry; Option compensation; AGENCY COSTS; trade-off; debt; firm

摘要

Firms provide convexity in managers' compensation plans (vega) to induce risk-averse managers to pursue risky, positive net present value projects. The resulting alignment of managers' and shareholders' incentives creates conflicts with lenders, who face an increased risk of default when managers pursue risky investments. We hypothesize that lenders would respond by stepping up their monitoring and threatening foreclosure to inhibit managers from acting on their vega incentives. Strong lender monitoring should, thus, reduce the efficacy of vega incentives. We test this hypothesis in a unique setting, where lenders purchase credit insurance, reduce their exposure to downside risk, and lower their monitoring. Afterward, we find a stronger association between vega incentives and the firms' risky investments. We contribute to the literature by showing that strong lender monitoring reduces the effectiveness of vega incentives and, thus, of the compensation mechanisms that boards of directors put in place to resolve manager-shareholder conflicts.