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Paper eres2011_338:
Managerial Risk-Taking Incentive and Secured Debt: Evidence from REITs

id eres2011_338
authors Yuan, Wei; Ong, Seow Eng
year 2011
title Managerial Risk-Taking Incentive and Secured Debt: Evidence from REITs
source 18th Annual European Real Estate Society Conference in Eindhoven, the Netherlands
summary This study examines the impact of managerial risk-taking attitudes on firm’s debt seniority policies. Following Coles, Daniel and Naveen (2006) we viewed higher value of the sensitivity to stock return volatility in managerial compensation (Vega) as indication of managers’ tendency to adopt a riskier policy choice. Using sample of US equity REITs during 2001-2009, we found a positive relation between secured debt ratio and Vega implying that risk-taking managers tend to use more secured debt in their capital structure. There are two plausible explanations for this observation. “Free cash flow hypothesis” posits that high risk-taking managers use more secured debt with purpose to generate more free cash flow to finance their risky projects. “Contracting cost hypothesis” on the other hand argues that increased secured debt helps attenuate the agency cost between shareholders and creditors arising from higher managerial risk-taking incentives.
keywords Executive compensation, Managerial incentives, Secured debt ratio
series ERES:conference
content file.pdf (285,010 bytes)
discussion No discussions. Post discussion ...
session P5: RE Finance & Investment [doctoral session]
last changed 2014/10/21 21:51
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