It's well worth it to remember than equity is just a call option on the value of the firm. Therefore, it's often in the equity-holder's interest to do two thin

It's well worth it to remember than equity is just a call option on the value of the firm. Therefore, it's often in the equity-holder's interest to do two things: 1. increase the volatility of the underlier (by making riskier investments, etc.) 2. Re-strike the option to be closer to at-the-money, by loading up with more debt or paying out cash as dividends Both actions increase the odds that the firm goes bankrupt, but also increases the expected payout to equity holders. When you increase equity compensation to executives, you basically encourage them to do riskier things.