Accounting-Based Compensation and Debt Contracts
Charles A. Dice Center Working Paper No. 2017-07
58 Pages Posted: 22 Feb 2017 Last revised: 18 Feb 2018
Date Written: February 2, 2018
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: Suggested Citation