Top Management Incentives and the Pricing of Corporate Public Debt

By Hernán Ortiz-Molina. Journal of Financial and Quantitative Analysis, 2006

178 citations recorded by the source corpus.

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 price new debt issues using the information about a firm's future risk choices contained in managerial incentive structures, and that lenders anticipate higher risk-taking incentives from managerial stock options than from equity ownership.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/af8b6c2169c35e6509bc6cfdc4f579b03a11adca

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Citations in the corpus

Corporate Governance and the Cost of Debt: Evidence from Director Limited Liability and Indemnification Provisions (2011, unknown): “Our results that the G-index is negatively related to ratings and positively related to spreads are in contrast with most of the existing literature (e.g., Klock et al., 2005; ACL; Chava et al., 14 The results with respect to CEO option holdings and earnings quality hold with a first-difference (cha”
Do Nonfinancial Stakeholders Affect the Pricing of Risky Debt? Evidence from Unionized Workers (2012, unknown): “…and bond return premium in the 5 to 25 percent ownership range; Anderson et al. (2003) show that founding family ownership reduces bond yields; Ortiz-Molina (2006) finds that, in pricing debt issues, bondholders anticipate higher risk-taking incentives from managerial stock options than from…”
Executive Compensation and Capital Structure: The Effects of Convertible Debt and Straight Debt on CEO Pay (2007, background): “…higher risk-taking incentives than stock (e.g., Guay, 1999), and thus are likely to cause higher agency costs of debt.8 Supporting this view, Ortiz-Molina (2006) finds that prospective bondholders anticipate higher risk-shifting incentives from managerial stock options than from equity…”
Board Compensation Practices and Agency Costs of Debt (2008, unknown): “24 These results are different from Ortiz-Molina (2006).”
Policy Risk, Corporate Political Strategies, and the Cost of Debt (2016, background): “For example, Cohen, Coval, and Malloy (2011) show that fiscal spending shocks that lead to increases in federal spending significantly dampen corporate investment and employment.”
Corporate Cash Holdings and CEO Compensation Incentives (2011, unknown): “3 Recent empirical work documents a positive relation between the cost of debt – as measured by credit spreads – and managerial stock ownership (Ortiz-Molina (2006)) and the volatility sensitivity (vega) of CEO compensation (Daniel, Martin, and Naveen (2004) and Brockman, Martin, and Unlu (2010)).”
Do Country Level Investor Protections Impact Security Level Contract Design? Evidence from Foreign Bond Covenants (2012, unknown): “We also include managerial ownership variable as recent papers by Klock, Mansi, and Maxwell (2005), Ortiz-Molina (2006), Cremers, Nair, and”
Have Rating Agencies Become More Conservative? Implications for Capital Structure and Debt Pricing (2013, background): “…times number of shares outstanding, from CRSP); F, the face value of debt in million $ (debt in current the previous 12 months (see Bharath and Shumway (2008)), (5) profitability, asset tangibility, and book leverage as defined previously (see Ortiz-Molina (2006) and Bharath and Shumway (2008)).”