Are Banks Happy When Managers Go Long? The Information Content of Managers' Vested Option Holdings for Loan PricingCoauthor(s): Cristian Dezso.
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
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.