PhD Lunch Seminars Rotterdam

Guangyao Zhu (EUR)

We investigate which assumption on executive preferences best matches the market expectations around CEO stock grants events. We measure market expectations of executive risk-taking by changes in firms’ CDS spreads and derive utility-adjusted risk-taking incentives under various preference assumptions. We find significantly positive abnormal CDS spread changes around first-time CEO stock grant events. The result is stronger for companies with high leverage, low Altman (1968) Z-Score, and low-grade credit ratings. We further show that loss aversion is most consistent with the evidence. Our study highlights the link between changes in executive compensation, risk taking, and preference identification.