Post by Anantharaman on Jan 8, 2011 10:04:07 GMT 4
Inside Debt and the Design of Corporate Debt Contracts
Divya Anantharaman
Columbia University
Vivian W. Fang
Rutgers University
Guojin Gong
Penn State University - Smeal College of Business
December 1, 2010
Abstract:
Agency theory posits that debt-like compensation (such as defined-benefit pensions and other deferred compensation) aligns managerial interests more closely with those of debtholders and reduces the agency cost of debt. Consistent with theory, we find that a higher CEO relative leverage, defined as the ratio of the CEO's inside leverage (debt-to equity compensation) to corporate leverage, is associated with lower cost of debt financing and fewer restrictive covenants, for a sample of private loans originated during 2006-2008. These findings persist after accounting for the endogeneity of CEO relative leverage, and are more pronounced for firms with higher default risk. Additional analysis on a sample of new public bond issues also shows a negative relation between CEO relative leverage and bond yield spread. Overall, the evidence supports the notion that debtholders recognize the incentive effects of executive debt-like compensation and adjust the terms of corporate debt contracts accordingly.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1718783_code365137.pdf?abstractid=1718783&mirid=2
Divya Anantharaman
Columbia University
Vivian W. Fang
Rutgers University
Guojin Gong
Penn State University - Smeal College of Business
December 1, 2010
Abstract:
Agency theory posits that debt-like compensation (such as defined-benefit pensions and other deferred compensation) aligns managerial interests more closely with those of debtholders and reduces the agency cost of debt. Consistent with theory, we find that a higher CEO relative leverage, defined as the ratio of the CEO's inside leverage (debt-to equity compensation) to corporate leverage, is associated with lower cost of debt financing and fewer restrictive covenants, for a sample of private loans originated during 2006-2008. These findings persist after accounting for the endogeneity of CEO relative leverage, and are more pronounced for firms with higher default risk. Additional analysis on a sample of new public bond issues also shows a negative relation between CEO relative leverage and bond yield spread. Overall, the evidence supports the notion that debtholders recognize the incentive effects of executive debt-like compensation and adjust the terms of corporate debt contracts accordingly.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1718783_code365137.pdf?abstractid=1718783&mirid=2