Dual Ownership and Risk-Taking Incentives in Managerial Compensation*

This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms' executive compensation. Firms with a higher ownership share by "dual holders"-institutional investors that simultaneously hold equity and bond of the company-adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.