Manager Incentives in Collateralized Debt Obligations
Author | : Kedran Rae Garrison |
Publisher | : |
Total Pages | : 71 |
Release | : 2005 |
ISBN-10 | : OCLC:1290343744 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Manager Incentives in Collateralized Debt Obligations written by Kedran Rae Garrison and published by . This book was released on 2005 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper quantifies under-investment and asset substitution problems in the collateralized debt obligation or quot;CDOquot; market. CDOs are closed-end, actively-managed, highly leveraged bond funds. Using observed and historical default rates, I differentiate the costs of financial and agency-induced stress and weigh against effort benefits. For most parameterizations ex-ante effort benefits greatly outweigh risk-shifting costs. I also analyze various payout policies and covenants for their ability to curtail manager risk-shifting while not overly restricting effort. Excess interest diversions, contingent trading limits, and coverage test quot;haircutsquot; of lower-priced assets are effective measures and increase allowable leverage and equity returns.