Executive Compensation and the Cost of Debt
Posted: 10 Jul 2013
Date Written: August 1, 2013
This study examines how different components of executive compensation affect the cost of debt. We find that debt-like and equity-like pay components have differing effects: an increase in defined benefit pensions is associated with lower bond yield spread, while higher share holdings lead to higher spreads. In addition, we find that stock options have a mixed impact on the cost of debt whereas cash bonus has no significant impact. Overall, our results indicate that corporate bondholders are fully aware of both risk-taking and risk-avoiding incentives created by various executive pay components.
Keywords: Executive compensation, CEO pay, Cost of debt, Yield spread
JEL Classification: G31, G34
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