Tournament incentives, credit default swaps trading, and corporate policies: The interplay of managerial and creditor incentives

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Abstract

This paper investigates how the interaction between managerial and creditor incentives affects corporate risk and policies. Using a sample of 16,513 firm-year observations from 2001 to 2014, we find that credit default swaps (CDS) trading leads to higher stock return volatility and leverage, yet lower cash flow volatility and capital expenditure. Meanwhile, tournament incentive is associated with higher firm risk and more aggressive corporate policies. Further, we find that the interaction between tournament incentives and CDS trading alleviates the overall effect of intra-firm tournament incentives and CDS trading on firm risk and corporate policies. Altogether, our results suggest that risk-averse managers balance risk-taking incentives and creditor incentives when making corporate decisions and, hence are less sensitive to tournament incentives due to their concerns about exacting empty creditors problems in CDS-referenced firms. This study contributes to the literature by providing initial insights into the interaction effects between managerial and creditor incentives.

Keywords: Tournament Incentives, Credit Risk, Credit Default Swaps, Firm Risk, Corporate Policies

Authors’ individual contribution: Conceptualization — L.D. and J.H.; Methodology — L.D. and J.H.; Formal Analysis — L.D.; Writing — Original Draft — L.D.; Writing — Review & Editing — L.D. and J.H.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G34, J31

Received: 06.03.2024
Accepted: 02.08.2024
Published online: 06.08.2024

How to cite this paper: Du, L., & Huang, J. (2024). Tournament incentives, credit default swaps trading, and corporate policies: The interplay of managerial and creditor incentives. Corporate Ownership & Control, 21(3), 164–173. https://doi.org/10.22495/cocv21i3art14