Top-Management Incentives and the Pricing of Corporate Public Debt
49 Pages Posted: 29 Feb 2004
Date Written: May 2004
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: Suggested Citation