David Ross

Are Banks Happy When Managers Go Long? The Information Content of Managers' Vested Option Holdings for Loan Pricing

Coauthor(s): Cristian Dezso.

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Abstract:

While traditional finance theory holds that managers with option-laden incentive contracts may favor equity at the expense of debt, a risk-averse manager may be more likely to retain vested in-the-money options if the manager has private information that the firm's risk-adjusted performance will be better. It follows that vested option holdings should be positively associated with credit quality. In support of this, we find that vested option holdings have a strong negative association with loan pricing, especially for informationally sensitive loans, and also predict higher cash flows and credit ratings, a greater distance to default, and lower equity volatility.

Source: Journal of Financial Economics
Exact Citation:
Dezso, Cristian, and David Ross. "Are Banks Happy When Managers Go Long? The Information Content of Managers' Vested Option Holdings for Loan Pricing." Journal of Financial Economics 106 (2012): 395-410.
Volume: 106
Pages: 395-410
Date: 2012