Managerial risk-taking incentives and debt diversity: Evidence from FAS 123R

We investigate how managerial risk-taking incentives affect corporate borrowing diversity using the adoption of FAS 123R as a quasi-natural experiment. We find that a reduction of managerial risk-taking incentives induced by FAS 123R leads to greater borrowing diversity. We also observe reduced capitalized leases and convertible debt issuance following FAS 123R. Overall, our findings suggest that CEOs are less likely to promote a diversified debt structure in the presence of greater compensation risk-taking incentives (vega).