On the optimality of resetting executive stock options
Journal of Financial Economics · 2000 · Volume 57 · Issue 1
DOI: 10.1016/S0304-405X(00)00051-9
Abstract
We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels — risky firms just above the IG cutoff — enjoyed subsidized bond financing in 2009–19. This effect is driven by Fed purchases of securities inducing long-duration IG-focused investors to rebalance their portfolios towards higher-yielding IG bonds. The benefiting firms (i) exploited the sluggish downward adjustment of credit ratings after M&A to finance risky acquisitions with bond issuances, and (ii) increased market share affecting competitors’ employment and investment, but (iii) suffered severe downgrades at the onset of the pandemic.
Keywords
Contract renegotiation, CEO compensation, Repricing, Managerial incentives, Executive stock options
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