Stockholder and Bondholder Wealth Effects of CEO Incentive Grants

34 Pages Posted: 18 Aug 2006

See all articles by Matthew T. Billett

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance

David C. Mauer

affiliation not provided to SSRN

Yilei Zhang

University of North Carolina (UNC) at Charlotte

Date Written: August 2006

Abstract

We examine stock and bond price reactions to first time grants of equity compensation to CEOs. For firms granting options and/or restricted stock to their CEOs for the first time during the period 1992 to 2004, we find large positive stock price reactions and large negative bond price reactions. The negative bondholder reactions are significantly larger when the CEO has little or no prior equity ownership and significantly smaller for firms with weak shareholder rights (greater managerial power). We establish links between the stock and bond price reactions and the incentive characteristics of the grants. We find that stock price reactions decrease in CEO pay-performance sensitivity (delta) and increase in the sensitivity of CEO wealth to stock volatility (vega). In contrast, we find that bondholder reactions increase in delta and decrease in vega when the CEO has little or no equity ownership prior to the grant.

Keywords: Equity-based compensation, options, restricted stock, CEO incentives

JEL Classification: G12, G30, G32, G34, J33

Suggested Citation

Billett, Matthew T. and Mauer, David C. and Zhang, Yilei, Stockholder and Bondholder Wealth Effects of CEO Incentive Grants (August 2006). Available at SSRN: https://ssrn.com/abstract=924765 or http://dx.doi.org/10.2139/ssrn.924765

Matthew T. Billett

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3366 (Phone)

David C. Mauer (Contact Author)

affiliation not provided to SSRN

Yilei Zhang

University of North Carolina (UNC) at Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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