Accounting-Based Compensation and Debt Contracts

Fisher College of Business Working Paper No. 2017-03-007

Charles A. Dice Center Working Paper No. 2017-07

58 Pages Posted: 22 Feb 2017 Last revised: 18 Feb 2018

See all articles by Zhi Li

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics

Lingling Wang

University of Connecticut - Department of Finance

Karen H. Wruck

Ohio State University - Fisher College of Business, Department of Finance

Date Written: February 2, 2018

Abstract

Adding accounting-based performance plans to management compensation packages influences borrowing costs and structure of corporate debt contracts. After granting long-term accounting-based incentive plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new loans. Lenders impose fewer earnings-based covenants after firms adopt earnings-based LTAPs. Results are stronger for firms with high leverage or bankruptcy risk, and that are difficult for lenders to monitor. Results are robust to alternative borrowing cost measures, including new public bond spreads, credit ratings, and CDS spreads. Overall, evidence suggests that adding LTAPs to compensation packages helps align debtholder and shareholder interests.

Keywords: Accounting-based Compensation Plan, Agency Costs, Agency Problems, Bank Loans, Bond Yield, Borrowing Cost, CEO Compensation, CDS Spreads, Conflicts of Interest, Debtholder-Shareholder Conflicts, Credit Ratings, Debt Contracts, Debt Covenants, Loan Spreads, Public Bond Offerings

JEL Classification: M52; M41; J33; G30

Suggested Citation

Li, Zhi and Wang, Lingling and Wruck, Karen H., Accounting-Based Compensation and Debt Contracts (February 2, 2018). Fisher College of Business Working Paper No. 2017-03-007. Available at SSRN: https://ssrn.com/abstract=2921223 or http://dx.doi.org/10.2139/ssrn.2921223

Zhi Li

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States
714-6287224 (Phone)

Lingling Wang

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Karen H. Wruck (Contact Author)

Ohio State University - Fisher College of Business, Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4330 (Phone)
614-292-2418 (Fax)

HOME PAGE: http://https://fisher.osu.edu/people/wruck.1

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