Duration of Executive Compensation and Maturity Structure of Corporate Debt

57 Pages Posted: 25 Jun 2019 Last revised: 17 Aug 2022

See all articles by Xudong Fu

Xudong Fu

University of Louisville

Minjie Huang

University of Louisville - Department of Finance

Tian Tang

University of Louisville

Date Written: February 23, 2022

Abstract

While recent studies show that long vesting periods in managerial compensation increase corporate investments, these investments such as research and development contribute to information asymmetry and therefore may affect the maturity structure of corporate debt. We find that firms with longer CEO pay duration have shorter debt maturity, which is consistent with the notion that firms shorten debt maturity to mitigate information asymmetry. This effect is stronger for firms with larger bid-ask spread, less analyst coverage, more growth options, more volatile returns, and lower default risk and for firms in R&D intensive industries. Firms with longer CEO pay duration prefer debt issuance over equity issuance, and they also exhibit higher future investment growth and Tobin’s Q. We strengthen the identification by exploiting the quasi-randomly staggered compliance of a regulatory change (FAS 123-R) and the enforceability of noncompetition agreements as exogenous shocks to CEO pay duration. Our paper shows that the duration of executive compensation affects corporate financing decisions.

Keywords: information asymmetry; debt maturity structure; CEO pay duration; investment

JEL Classification: G31, G33, G34

Suggested Citation

Fu, Xudong and Huang, Minjie and Tang, Tian, Duration of Executive Compensation and Maturity Structure of Corporate Debt (February 23, 2022). Journal of Corporate Finance, 2022, Vol. 73, No. 102188, Available at SSRN: https://ssrn.com/abstract=3404522 or http://dx.doi.org/10.2139/ssrn.3404522

Xudong Fu

University of Louisville ( email )

Louisville, KY 40292
United States

Minjie Huang (Contact Author)

University of Louisville - Department of Finance ( email )

College of Business
Harry Frazier Hall
Louisville, KY 40292
United States

Tian Tang

University of Louisville ( email )

United States
502-852-4819 (Phone)

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