Top-Management Incentives and the Pricing of Corporate Public Debt

49 Pages Posted: 29 Feb 2004

See all articles by Hernan Ortiz-Molina

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

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Date Written: May 2004

Abstract

This article examines managerial ownership structure and at-issue yield spreads on corporate bonds. There is a positive relation between managerial ownership and borrowing costs, and this relation is weaker at higher levels of ownership. In addition, managerial stock options have a larger effect on yield spreads than stock ownership. These effects exist after controlling for firm and bond characteristics, and are robust to endogeneity and sample selection concerns. The evidence suggests that rational bondholders use the information about a firm's future risk choices contained in managerial incentives structures when pricing new debt issues, and that lenders anticipate higher risk-taking incentives from managerial stock options than from equity ownership.

Keywords: Executive compensation, managerial incentives, bond yields, stockholder-bondholder conflicts

JEL Classification: G32, G34, J33, D82

Suggested Citation

Ortiz-Molina, Hernan, Top-Management Incentives and the Pricing of Corporate Public Debt (May 2004). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=510282 or http://dx.doi.org/10.2139/ssrn.510282

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