The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt

31 Pages Posted: 26 Apr 2013

See all articles by Andrew K. Prevost

Andrew K. Prevost

University of Vermont

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance

Date Written: April/May 2013

Abstract

We examine how effort and risk incentives embedded in CEO equity incentives are related to the cost of debt and the role credit worthiness plays in this relationship. Our empirical approach addresses a number of unanswered questions in the literature by examining the sources and effects of co‐movements in CEO incentives, whether the proportionality of these movements is rationally priced, and whether the effects are concentrated among bonds with greater likelihood of default. Our findings confirm that effort and risk incentives are rationally priced by bond market participants. We also show that significant cross‐sectional effects are more pronounced for speculative bonds, implying that previously documented links between equity incentives and the cost of debt may not be generalizable to all debt issues.

Keywords: executive compensation, cost of debt

Suggested Citation

Prevost, Andrew K. and Devos, Erik and Rao, Ramesh P., The Effects of Relative Changes in CEO Equity Incentives on the Cost of Corporate Debt (April/May 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 3-4, pp. 470-500, 2013. Available at SSRN: https://ssrn.com/abstract=2256820 or http://dx.doi.org/10.1111/jbfa.12023

Andrew K. Prevost (Contact Author)

University of Vermont ( email )

Burlington, VT 05405
United States

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

Ramesh P. Rao

Oklahoma State University - Stillwater - Spears School of Business - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-1385 (Phone)
405-744-5180 (Fax)

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