Investor Reactions to CEOs’ Inside Debt Incentives

Wei, Chenyang; Yermack, David

doi:10.2139/ssrn.1604046

Cited by 36 publications

(32 citation statements)

References 34 publications

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“…The median package carries one covenant. Similar to Wei and Yermack (2011), we find that the distribution of relative leverage is right-skewed with mean (median) of 1.29 (0.33). The average relative leverage from pension plans (0.68) is similar to that from ODC plans (0.61), but 66% of the sample has ODC while only 54% has pensions.…”

Section: Promised Yield and Covenantsupporting

confidence: 60%

“…Starting with Sundaram and Yermack (2007), a stream of literature has emerged with the general consensus that pension and ODC plans, as a whole, function as inside debt and are effective at mitigating stockholder-debtholder conflicts. These studies show that firms providing their CEOs with more debt-like compensation have lower likelihood of default (Sundaram and Yermack 2007), engage in less risk taking (Tung andWang 2011, Cassell et al 2012), face fewer covenants in bond contracting (Chava et al 2010), and are priced higher in the secondary bond market (Wei and Yermack 2011). We complement these studies by first documenting an average incentive-alignment effect of debt-like compensation on private loan contracting.…”

Section: Introductionmentioning

confidence: 78%

“…ODC plans do not have to be secured or funded, similar to SERPs, but differ significantly from SERPs in withdrawal flexibility and payment form (Clark Consulting 2009, Lee and Tang 2010, Wei and Yermack 2011. First, although pension benefits are usually paid out at or after retirement, ODC plans often allow withdrawal on a prespecified schedule that can start before retirement, leaving the executive with flexibility over the maturity of her claims.…”

Section: Introductionmentioning

confidence: 99%

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Inside Debt and the Design of Corporate Debt Contracts

2014

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T heory posits that managerial holdings of debt ("inside debt") align managers' incentives with those of outside debtholders. Executive pensions, consisting of rank-and-file (RAF) plans and supplemental executive retirement plans (SERPs), and other deferred compensation (ODC) have debt-like payoffs, and could therefore function as inside debt. However, whereas SERPs are often unfunded and unsecured, RAF plans are funded and secured to some extent, and ODC may be invested in equity and withdrawn flexibly before retirement. Special arrangements in executive debt-like compensation could hence weaken or even nullify any incentive-alignment effect. We find that higher CEO debt-like compensation leads to lower promised yield and fewer covenants in a sample of loans originated in 2006-2008. This effect is driven entirely by benefits accrued under SERPs, consistent with SERPs more closely resembling risky corporate debt; balances accrued under RAF and ODC plans do not provide similar effects. Furthermore, promised yields are lower when debt-like compensation claims can be withdrawn only after outside debt claims are expected to settle. Our findings persist after accounting for endogeneity using state personal income tax rates as an instrument for CEOs' willingness to defer compensation. Overall, the evidence suggests that executive debt-like compensation is only effective at resolving stockholderdebtholder conflicts when its payoffs are truly debt-like and that lenders' perceptions are affected not only by the magnitude of debt-like compensation but also by its seniority.Data, as supplemental material, are available at http://dx.

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Section: Promised Yield and Covenantsupporting

confidence: 60%

Section: Introductionmentioning

confidence: 78%

Section: Introductionmentioning

confidence: 99%

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Inside Debt and the Design of Corporate Debt Contracts

2014

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“…Recent research has demonstrated that managers' holdings of inside debt may counteract the incentivizing effect of equity compensation by inducing greater managerial conservatism (Sundaram and Yermack, 2007;Wei and Yermack, 2011). If managers' vested option holdings are a proxy for, or highly correlated with, managers' inside debt holdings, like accrued pension benefits and deferred compensation, our results may reflect the incentive effects of inside debt rather than the information content of managers' vested option holdings themselves.…”

Section: Inside Debtmentioning

confidence: 69%

Are banks happy when managers go long? The information content of managers’ vested option holdings for loan pricing

Dezső¹,

Ross²

2012

Journal of Financial Economics

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“…Mutual funds use the inside information available to the affiliated banks that are lending to firms to accumulate equity positions (Massa and Rehman, 2008). Debt ownership by company Chief Financial Officers (CEOs) is related to higher bond and lower equity prices and lower volatility of both securities (Wei and Yermack, 2011); lower loan spreads (Wang, Xie, and Xin, 2010); fewer bond covenants (Chava, Kumar, and Warga, 2010); lower debt default rates (Sundaram and Yermack, 2007); and in general, lower overall riskiness of firms and as a result better performance during the crisis (Tung and Wang, 2012).…”

Section: Introductionmentioning

confidence: 99%