Exec.Comp
ARTICLE IN PRESS
Journal of Accounting and Economics 43 (2007) 69–93 www.elsevier.com/locate/jae
Executive compensation and capital structure: The effects of convertible debt and straight debt on CEO pay$
Hernan Ortiz-MolinaÃ
Sauder School of Business, The University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2 Received 4 April 2005; received in revised form 22 September 2006; accepted 28 September 2006 Available online 16 November 2006
Abstract I examine how CEO compensation is related to firms’ capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay–performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. Furthermore, stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager incentive alignment in order to mitigate shareholder-bondholder conflicts of interest. The hypothesis that debt reduces managershareholder conflicts can explain some but not all of the results. r 2006 Elsevier B.V. All rights reserved.
JEL classification: G32; G34; J33; D82 Keywords: Executive compensation; Corporate governance; Agency problems; Capital structure
$ This paper is derived from my doctoral dissertation at the University of Maryland. I thank especially my thesis committee, Roger Betancourt, Gordon Phillips, Nagpurnanand Prabhala, Lawrence Ausubel, and Ginger Jin. Thanks also to Samuel Berlinski, Martin Boyer, Murray Carlson, Gilles Chemla, Alan Douglas, Jerry Feltham, Adlai Fisher, Murray Frank, S.P. Kothari (the Editor), Kin Lo, an anonymous referee, and seminar ´ participants at HEC Montreal, Tilburg University, University of British Columbia, University of Maryland, University of Warwick, Norwegian School of Management, Stockholm School of
Journal of Accounting and Economics 43 (2007) 69–93 www.elsevier.com/locate/jae
Executive compensation and capital structure: The effects of convertible debt and straight debt on CEO pay$
Hernan Ortiz-MolinaÃ
Sauder School of Business, The University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2 Received 4 April 2005; received in revised form 22 September 2006; accepted 28 September 2006 Available online 16 November 2006
Abstract I examine how CEO compensation is related to firms’ capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay–performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. Furthermore, stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager incentive alignment in order to mitigate shareholder-bondholder conflicts of interest. The hypothesis that debt reduces managershareholder conflicts can explain some but not all of the results. r 2006 Elsevier B.V. All rights reserved.
JEL classification: G32; G34; J33; D82 Keywords: Executive compensation; Corporate governance; Agency problems; Capital structure
$ This paper is derived from my doctoral dissertation at the University of Maryland. I thank especially my thesis committee, Roger Betancourt, Gordon Phillips, Nagpurnanand Prabhala, Lawrence Ausubel, and Ginger Jin. Thanks also to Samuel Berlinski, Martin Boyer, Murray Carlson, Gilles Chemla, Alan Douglas, Jerry Feltham, Adlai Fisher, Murray Frank, S.P. Kothari (the Editor), Kin Lo, an anonymous referee, and seminar ´ participants at HEC Montreal, Tilburg University, University of British Columbia, University of Maryland, University of Warwick, Norwegian School of Management, Stockholm School of
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