Bankruptcy risk induced by career concerns of regulators |
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Affiliation: | 1. Institute of Industrial Economics, Jinan University, Guangzhou, China;3. Xi Jinping Institute of Socialism with Chinese Characteristics for a New Era, Peking University, Beijing, China |
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Abstract: | We introduce a model in which a regulator employs mechanism design to embed her human capital beta signal(s) in a firm’s capital structure. This can enhance her compensation at the firm, and the value of her contract with the firm in the form of an executive stock option. We prove that the agency cost of this revolving door behavior increases the firm’s financial leverage, bankruptcy risk, and affects estimation of firm value at risk (VaR). |
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Keywords: | Career concerns Revolving door Managerial compensation Bankruptcy Value-at-risk Human capital C02 G13 G18 G38 J24 J44-45 |
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