Managerial Risk-Taking and Secured Debt: Evidence from REITS
This study focuses on the correlation between secured debt and managerial risk-taking incentive. A few findings need to be emphasized. First is the positive relation between secured debt and managerial risk-taking incentive (LNVEGA). This relation is confirmed by several robustness tests. This relation indicates that secured debt ratio is affected by executive compensation and increases in managerial risk-taking incentive. Second, I posit that this positive relation can be explained in two possible ways. ?Free cash flow hypothesis? gives the reason that firms with high risk-taking incentives would like to use more secured debt to generate extra cash to finance risky projects. On the other hand, ?Cost contracting hypothesis? implies that the positive relation is driven by the fact that shareholders try to raise secured debt ratio to compensate creditors due to the increasing managerial risk-taking incentives. These two hypotheses have different predictions for the wealth effect of secured debt ratio change. That is how I distinguish them to find out what drives the positive relation between secured debt ratio and managerial risk-taking incentive. Overall, this research extends literature in several ways, including executive equity-based compensation, determinants of secured debt issuance and agency cost of debt. Among them, the key finding of this study lies in the role of secured debt in mitigating the agency cost between shareholders and creditors arising from managerial risk-taking incentive.
Managerial Risk-Taking Incentive, Secured Debt, REITs
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