CEO Incentives and the Cost of Debt
نویسنده
چکیده
Motivated by concerns that stock-based compensation might lead to excessive risk-taking, this paper examines the relations between CEO incentives and the cost of debt. Unlike prior research, this paper uses the sensitivities of CEO stock and option portfolios to stock price (delta) and stock return volatility (vega) to measure CEO incentives. Higher delta (vega) is predicted to be related to less (greater) risk-seeking, and thus lower (higher) cost of debt. The results show that yield spreads on new debt issues are lower for firms with higher CEO delta, and are unrelated to CEO vega. While yield spreads are higher for firms whose CEOs hold more shares and options, a sample firm at the 3 rd quartile level of each of this study’s CEO incentive variables would expect an estimated 26 basis point reduction in yield spread on a new debt issue, relative to a sample firm at the median level of the CEO variables. In sum, CEO incentives are related to a lower cost of debt. Helpful comments from workshop participants at the University of Missouri and the American Accounting Association national meeting (Chicago) Midwest Regional meeting (St. Louis) are appreciated.
منابع مشابه
Executive Compensation and the Cost of Debt
We examine how executive compensation affects the cost of debt financing. Analyzing CEO pay data from the UK, we find that debt-like and equity-like pay components have opposite effects on the cost of debt. An increase in defined benefit pensions is associated with lower bond yield spread, while an increase in executive stock options intensifies it. In addition, we find some evidence that cash ...
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