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Bankruptcy Risk Induced by Career Concerns of Regulators

Godfrey Cadogan and John A. Cole

posted on 30 December 2013

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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, in order to enhance the value of her post career change indexed executive stock option contract with the firm. 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).