CDS, CEO compensation, and firm value

Abu Amin; Pawan Jain; Arun Upadhyay

doi:10.1016/j.frl.2021.102445

CDS, CEO compensation, and firm value

Abu Amin, Pawan Jain, Arun Upadhyay

Finance And Law

Research output: Contribution to journal › Article › peer-review

Abstract

We study the initiation effect of credit default swaps on CEOs performance-sensitive compensation and shareholder value. We find that the initiation effect of CDS contracts on CEO's delta varies by the characteristics of firms. Firms with higher R&D and intangibles reduce CEO's delta whereas firms with higher CAPX intensity increase it. Moreover, shareholder value with high CAPX intensity increases with the initiation of CDS contracts but deteriorates in firms with high R&D intensity or intangible assets. Overall, our findings support the empty creditor hypothesis and show that firms use this opportunity to alter other governance mechanisms to maximize their value.

Original language	English
Article number	102445
Journal	Finance Research Letters
Volume	46
DOIs	https://doi.org/10.1016/j.frl.2021.102445
State	Published - May 2022

Keywords

Compensation
Credit default swaps
Valuation

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10.1016/j.frl.2021.102445

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title = "CDS, CEO compensation, and firm value",

abstract = "We study the initiation effect of credit default swaps on CEOs performance-sensitive compensation and shareholder value. We find that the initiation effect of CDS contracts on CEO's delta varies by the characteristics of firms. Firms with higher R&D and intangibles reduce CEO's delta whereas firms with higher CAPX intensity increase it. Moreover, shareholder value with high CAPX intensity increases with the initiation of CDS contracts but deteriorates in firms with high R&D intensity or intangible assets. Overall, our findings support the empty creditor hypothesis and show that firms use this opportunity to alter other governance mechanisms to maximize their value.",

keywords = "Compensation, Credit default swaps, Valuation",

author = "Abu Amin and Pawan Jain and Arun Upadhyay",

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AU - Amin, Abu

AU - Jain, Pawan

AU - Upadhyay, Arun

PY - 2022/5

Y1 - 2022/5

N2 - We study the initiation effect of credit default swaps on CEOs performance-sensitive compensation and shareholder value. We find that the initiation effect of CDS contracts on CEO's delta varies by the characteristics of firms. Firms with higher R&D and intangibles reduce CEO's delta whereas firms with higher CAPX intensity increase it. Moreover, shareholder value with high CAPX intensity increases with the initiation of CDS contracts but deteriorates in firms with high R&D intensity or intangible assets. Overall, our findings support the empty creditor hypothesis and show that firms use this opportunity to alter other governance mechanisms to maximize their value.

AB - We study the initiation effect of credit default swaps on CEOs performance-sensitive compensation and shareholder value. We find that the initiation effect of CDS contracts on CEO's delta varies by the characteristics of firms. Firms with higher R&D and intangibles reduce CEO's delta whereas firms with higher CAPX intensity increase it. Moreover, shareholder value with high CAPX intensity increases with the initiation of CDS contracts but deteriorates in firms with high R&D intensity or intangible assets. Overall, our findings support the empty creditor hypothesis and show that firms use this opportunity to alter other governance mechanisms to maximize their value.

KW - Compensation

KW - Credit default swaps

KW - Valuation

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DO - 10.1016/j.frl.2021.102445

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SN - 1544-6123

VL - 46

JO - Finance Research Letters

JF - Finance Research Letters

M1 - 102445

ER -

CDS, CEO compensation, and firm value

Abstract

Keywords

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