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Executive risk-taking and the agency cost of debt

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  • Imes, Matthew
  • Anderson, Ronald

Abstract

Firms compensate managers to maximize shareholder value, yet these same incentives affect bondholder risk. We investigate the relation between executive equity pay and the cost of debt. Our findings indicate a “u-shaped” relation between bond yields and equity pay. These results are consistent with the notion that bondholders prefer a moderate amount of executive equity pay and above or below that level, bondholders increase yields to protect their interests. These findings suggest that moderate levels of equity pay mitigate the agency costs between firm shareholders and bondholders.

Suggested Citation

  • Imes, Matthew & Anderson, Ronald, 2021. "Executive risk-taking and the agency cost of debt," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 78-94.
    • Handle: RePEc:eee:empfin:v:64:y:2021:i:c:p:78-94
    DOI: 10.1016/j.jempfin.2021.08.005
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    More about this item

    Keywords

    Executive compensation; Agency cost; Cost of debt; Risk shifting;
    All these keywords.

    JEL classification:

    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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