Managerial Ownership of Debt and Bank Loan Contracting
42 Pages Posted: 6 Nov 2010 Last revised: 7 Jun 2011
Date Written: September 21, 2010
Debt ownership by equity-holding managers aligns their incentives more closely with those of creditors, thereby reducing agency costs of debt. We test this hypothesis by examining how terms of bank loans are related to executive pension and deferred compensation, i.e., inside debt held by managers against their own firms. Within-firm differences around initial disclosures of executive pension and deferred compensation mandated by the SEC indicate that banks charge lower yield spreads on loans to firms whose CEOs hold more inside debt. Cross-sectional regressions confirm the negative relation between CEO inside debt holdings and loan spreads and further show that the negative relation is more pronounced when creditors face higher expropriation risk and when the CEO’s expected retirement horizon is beyond loan maturity. We also find that loans to firms with larger managerial debt holdings are associated with fewer covenant restrictions, less collateral requirement and smaller lending syndicates, consistent with lenders anticipating lower expropriation risk at these firms.
Keywords: Managerial ownership of debt, inside debt, executive pension, deferred compensation, bank loan contracting, loan spread, agency costs of debt, expropriation risk, syndicate size, covenant restriction, collateral requirement
JEL Classification: G32, G34, G20, G31
Suggested Citation: Suggested Citation