Discussion of the effects of corporate governance on firms’ credit ratings

Weber, Joseph

doi:10.1016/j.jacceco.2006.02.002

Cited by 42 publications

(22 citation statements)

References 15 publications

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“…LOG_LOAN_SPREAD consists of the spread of the loan and any annual (or facility) fee paid to lenders. We estimate regressions based on changes in loan spreads (equation (7)) to cope with potential endogeneity biases (Weber 2006) as well as time-invariant omitted variable issues. ΔLOG_LOAN_SPREAD is the change from the value of LOG_LOAN_SPREAD associated with the previous loan facility (i.e., loan issue) to the value of LOG_LOAN_SPREAD associated with a loan facility at year t. This variable requires a company to have at least two loan facilities in the sample period because the changes are the ones between financing events, and, therefore, the changes could be measured over multiple years.…”

Section: Empirical Specifications Used In the Dealscan Samplementioning

confidence: 99%

Does Other Comprehensive Income Volatility Influence Credit Risk and the Cost of Debt?

Bao

Billett

Smith³

et al. 2020

Contemporary Accting Res

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We examine the usefulness of other comprehensive income (OCI) to debt investors in nonfinancial companies. Motivated by Merton's (1974) real options framework, we construct a measure of incremental OCI volatility, designed to capture the effect of OCI on overall firm asset volatility, which is a primary driver of credit risk in Merton's (1974) model. We find that the volatility of incremental OCI influences the likelihood of default, credit ratings, and the cost of debt. Overall, our evidence suggests that creditors use information from OCI in their assessment of firm credit risk and in pricing debt contracts.

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Section: Empirical Specifications Used In the Dealscan Samplementioning

confidence: 99%

Does Other Comprehensive Income Volatility Influence Credit Risk and the Cost of Debt?

Bao

Billett

Smith³

et al. 2020

Contemporary Accting Res

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“…Fourth, I perform a regression on changes in pension deficits and idiosyncratic volatility to capture the dynamic relation between the two variables. An additional benefit of the change‐in‐variables regression is that it is less subject to the omitted variable problem (Weber ).…”

Section: Robustness Checksmentioning

confidence: 99%

Funding Status of Defined Benefit Pension Plans and Idiosyncratic Return Volatility

Chen

2015

J of Financial Research

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In this article, I explore how the funding status of a sponsoring firm's defined benefit pension plans affects its idiosyncratic volatility. Using a large sample of U.S. firms from 1980 to 2010, I document a positive and significant relation between pension deficits and idiosyncratic volatility. The relation is stronger for firms that are financially constrained and that have a worse information environment. The findings are consistent with the argument that large pension deficits generate greater risk for the firm's future operations and financing, and deteriorate its financial disclosure quality, which raises firm idiosyncratic volatility.

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“…22 22 Weber (2006), for example, suggests the use of change‐in‐variables regressions to address endogeneity concerns. Moreover, change‐in‐variables regressions are useful in mitigating problems with correlated omitted variables if such variables are time‐invariant in the levels regressions. …”

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confidence: 99%

Executive Compensation and the Maturity Structure of Corporate Debt

Brockman¹,

Martin²,

Ünlü

2010

The Journal of Finance

394

321

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Executive compensation influences managerial risk preferences through executives' portfolio sensitivities to changes in stock prices (delta) and stock return volatility (vega).Large deltas discourage managerial risk-taking, while large vegas encourage risk-taking.Theory suggests that short-maturity debt mitigates agency costs of debt by constraining managerial risk preferences. We posit and find evidence of a negative (positive) relation between CEO portfolio deltas (vegas) and short-maturity debt. We also find that shortmaturity debt mitigates the influence of vega-and delta-related incentives on bond yields.Overall, our empirical evidence shows that short-term debt mitigates agency costs of debt arising from compensation risk. JEL:G30; G32 Keywords: Executive compensation; Agency costs; Debt maturity * Lehigh University, Washington University, and University of Nebraska. The authors thank an anonymous referee and associate editor, the editor (Campbell R. Harvey), and co-editor (John R. Graham) for their suggestions and comments during the revision process. The authors also thank Mary McGarvey, James Schmidt and seminar participants at Washington University, University of Missouri, Texas Christian University, and University of Texas-Dallas for their comments. Forthcoming in THE JOURNAL OF FINANCE 2The use of stock-and option-based executive compensation has increased dramatically during the past few decades. The median exposure of CEO wealth to stock prices tripled between 1980 and 1994(Hall and Liebman (1998), and then doubled again between 1994and 2000 (Bergstresser and Philippon (2006). Such changes in executive compensation have a direct impact on the manager's exposure to risk, thus altering both incentives and behavior. Carpenter (2000) and Lambert, Larcker, and Verrecchia (1991) discuss two effects of compensation on managerial incentives. One effect is caused by the sensitivity of compensation to stock prices (delta). A second effect is caused by the sensitivity of compensation to stock return volatility (vega). The higher the compensation package's sensitivity to stock prices, the weaker will be the manager's appetite for risk (Knopf, Nam, and Thornton (2002)). In contrast, the higher the compensation package's sensitivity to stock return volatility, the stronger will be the manager's appetite for risk (Knopf, Nam, and Thornton (2002), Coles, Daniel, and Naveen (2006)). By altering managerial risk preferences, stock-based compensation also influences third-party (e.g., creditors, suppliers, customers) perceptions of those risk preferences. The primary objective of this study is to investigate the role of short-term debt in reducing agency costs of debt arising from executive incentive contracts. Specifically, we examine the effect of the two portfolio sensitivities on the maturity structure of corporate debt. In addition, we analyze the effect of debt maturity on the relation between portfolio sensitivities and bond yields. The empirical results provide a consistent picture that short-term...

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Discussion of the effects of corporate governance on firms’ credit ratings

Cited by 42 publications

References 15 publications

Does Other Comprehensive Income Volatility Influence Credit Risk and the Cost of Debt?

Does Other Comprehensive Income Volatility Influence Credit Risk and the Cost of Debt?

Funding Status of Defined Benefit Pension Plans and Idiosyncratic Return Volatility

Executive Compensation and the Maturity Structure of Corporate Debt

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