Executive Compensation and the Cost of Debt

Citation

Kabir R, Li H & Veld-Merkoulova YV (2013) Executive Compensation and the Cost of Debt. SSRN Working Paper Series, 1537318. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1537318

Abstract
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