CEO Compensation and Credit Default Swaps : Evidence from the U.S. And Germany

Executive compensation is designed to create incentives for CEOs to act in the best interest of shareholders. Short-term (bonus) and equity-based incentives induce risk taking behaviors of the CEO that could further change a firm's risk exposure. This article examines the linkage between compensation components and the impacts on a firm's credit risk using data from the U.S. and Germany. In the U.S., we find a positive relation between equity-based compensation and credit default swap spreads. Similar positive relation is also found between short-term incentive bonus pay suggesting compensation influece more risk taking for the U.S. firms. However, we do not find significantly positive relation between equity-based incentive and a firm's credit risk in German firms. Our results seem to indicate that bonus pay is large portion of pay for German CEOs therefore restraint CEOs‘ risk taking strategies