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Executive compensation and the cost of debt

Author

Listed:
  • Kabir, Rezaul
  • Li, Hao
  • Veld-Merkoulova, Yulia V.

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.

Suggested Citation

  • Kabir, Rezaul & Li, Hao & Veld-Merkoulova, Yulia V., 2013. "Executive compensation and the cost of debt," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2893-2907.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:8:p:2893-2907
    DOI: 10.1016/j.jbankfin.2013.04.020
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    More about this item

    Keywords

    Executive compensation; CEO pay; Cost of debt; Yield spread;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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