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Leverage Choice and Credit Spreads when Managers Risk Shift

Abstract : 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.
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https://hal-hec.archives-ouvertes.fr/hal-00585953
Contributor : Antoine Haldemann <>
Submitted on : Thursday, April 14, 2011 - 12:03:47 PM
Last modification on : Thursday, January 11, 2018 - 6:19:32 AM

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Ali Lazrak, Murray Carlson. Leverage Choice and Credit Spreads when Managers Risk Shift. The Journal of Finance, 2010, 65 (6), pp.2323-2362. ⟨10.1111/j.1540-6261.2010.01617.x⟩. ⟨hal-00585953⟩

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