Negative hedging: Performance-sensitive debt and CEOs' equity incentives

Alexei Tchistyi, David Yermack, Hayong Yun

Research output: Contribution to journalArticle


We examine the relation between chief executive officers' equity incentives and their use of performance-sensitive debt contracts. These contracts require higher or lower interest payments when the borrower's performance deteriorates or improves, thereby increasing expected costs of financial distress while making a firm riskier to the benefit of option holders. We find that managers whose compensation is more sensitive to stock volatility choose steeper and more convex performance pricing schedules, while those with high delta incentives choose flatter, less convex pricing schedules. Performance pricing contracts therefore seem to provide a channel for managers to increase firms' financial risk to gain private benefits.

Original languageEnglish (US)
Pages (from-to)657-686
Number of pages30
JournalJournal of Financial and Quantitative Analysis
Issue number3
StatePublished - Jun 1 2011

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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