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      Issuances and Repurchases: An explanation based on CEO risk-taking incentives

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      RASHID-THESIS.pdf (907.4Kb)
      Date
      2014-06-20
      Author
      Rashid, Harun
      Type
      Thesis
      Degree Level
      Masters
      Metadata
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      Abstract
      Abstract: There is an ongoing debate on whether risk-taking incentives align risk-averse managers’ interests with those of shareholders or whether such incentives lead to excessively risky firm and leverage policies. In this study, we shed light on this debate by using CEO risk-taking incentives, measured by the sensitivity of CEO wealth to changes in stock return volatility (Vega), and explain how Vega affects firms’ security issuance and repurchase activities. In general, we find that a higher Vega increases (decreases) the likelihood of debt issuance (share issuance) and it decreases (increases) the propensity of debt retirement (share repurchase). However, in high-levered firms, the positive effect of Vega on debt issuance and the negative influence of Vega on debt retirement are diminished. One the other hand, for equity issuance and repurchases, high leverage does not seem to alter the impact of Vega. These findings have three main implications: 1) in general, CEO risk-taking incentives (Vega) do affect the financing decisions of firms by increasing firms’ degree of leverage, (2) when existing leverage is high, CEO risk-taking incentives do not seem to induce CEOs to take excessive financial risks through debt issuance, but such incentives encourage them to continue repurchasing shares that would lead to even higher debt ratios and non-operational risks, and (3) firms with high Vega do not seem to adopt target debt ratios. JEL Classification: G30, G32, J33
      Degree
      Master of Science (M.Sc.)
      Department
      Edwards School of Business
      Program
      Finance
      Supervisor
      Maung, Min; Wilson, Craig
      Committee
      Yu, Miaomiao; Chance, Don
      Copyright Date
      April 2013
      URI
      http://hdl.handle.net/10388/ETD-2013-04-1021
      Subject
      Key Words: Compensation incentives, risk taking incentives, external financing, capital structure
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