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The Hidden Cost of Managerial Incentives: Evidence from the Bond and Stock Markets
SSRN Electronic Journal
2014
Abstract
We examine how incentives embedded in managerial compensation contracts are priced by the bond and stock markets. Specifically, the incentives we consider are the sensitivity of CEO wealth to stock price (delta) and the sensitivity of CEO wealth to stock-return volatility (vega). Controlling for other determinants, we find that higher levels of both vega and delta are associated with higher bond credit spreads and higher expected stock returns. In addition to having a direct effect on credit spreads and expected stock returns, higher incentives are also associated with lower average cash flows, higher volatility of cash flows, and higher volatility of stock returns (all of which increase credit spreads), and higher systematic risk (which increases expected stock return). Thus, higher incentives have a cascading effect on credit spreads and expected stock returns. Also, a portfolio of high-incentive firms significantly underperforms a portfolio of low-incentive firms on a risk-adjusted basis; thus, on average shareholders appear to be harmed ex post as a result of incentive provision
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Details
- Title
- The Hidden Cost of Managerial Incentives
- Creators
- Naveen D Daniel - Drexel University
- Publication Details
- SSRN Electronic Journal
- Publisher
- SSRN
- Resource Type
- Other
- Language
- German
- Academic Unit
- Finance
- Other Identifier
- 991020537637404721