Does CDS trading affect risk-taking incentives in managerial compensation?

On managerial risk - taking incentives when compensation may be hedged against

We consider a continuous time principal-agent model where the agent (the manager) can choose the output’s exposure to risk and the output’s expected return of the principal (the firm). Both the firm and the manager have exponential utility and can trade in a frictionless market. When the firm observes the manager’s choice of effort and volatility, there is an optimal contract that induces the m...

Impact of compensation structure and managerial incentives on bank risk taking

In this article, we analyze the impact of managerial compensation structure in publicly-traded banks on their risk taking behavior described by the loans extended by them, and the changes in risk taking through the changing regulatory environment for these banks. We build a simulation model to study the impact of the interaction between regulatory changes and competitiveness in the sector on ma...

Does Option Compensation Increase Managerial Risk Appetite?

This paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls. Under the manager’s optimal policy, the option ends up either deep in or deep out of the money. As the asset value goes to zero, volatility goes to infinity. However, the option compensation does not strictly lead to greater risk seeking. Sometimes, the manager’s o...

Appendix for “ Managerial risk - taking incentives and corporate pension policy ”

Insider Trading, Costly Monitoring, and Managerial Incentives

In this paper we show, in an incomplete contracts framework that combines asymmetric information and moral hazard, that by permitting insiders to trade on personal account the equilibrium level of output can be increased and shareholder welfare can be improved. There are two reasons for this. First, insider trading impounds information regarding the costs and benefits of effort and perk consump...