English, Article, Journal or magazine article edition: Leverage Choice and Credit Spread Dynamics when Managers Risk Shift Murray Carlson; Ali Lazrak

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Bookmark: http://trove.nla.gov.au/version/30608
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Leverage Choice and Credit Spread Dynamics when Managers Risk Shift
Author
  • Murray Carlson
  • Ali Lazrak
Physical Description
  • preprint
Notes
  • We develop a structural model of the leverage choices of risk-averse managers who are compensated with cash and stock. We further characterize credit spread dynamics over the life of the debt. Managers optimally balance the tax benefits of debt with the utility cost that results from their ex-post asset substitution choices. Our model predicts the existence of a U-shaped relationship between the cash component of pay and leverage levels: when cash compensation is low, safe debt with a high face value is issued and when cash compensation is high, risky debt with a high face value is issued. At moderate levels of the cash-to-stock value ratio low leverage is chosen but credit spreads can be significant and again relate to compensation terms. The model illustrates the quantitative importance of including agency costs in the tradeoff theory of capital structure
  • Credit Spreads, Capital Structure, Agency Costs of Debt
  • RePEc:red:sed006:193
Language
  • English
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