Optimal inside debt compensation and the value of equity and debt

Campbell, Timothy; Galpin, Neal; Johnson, Shane A.

doi:10.1016/j.jfineco.2015.09.003

Cited by 58 publications

(23 citation statements)

References 20 publications

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“…However, without credible instruments for inside debt, interpreting these correlations is di¢ cult. Finally, Campbell, Galpin, and Johnson (2016) provide suggestive evidence that shareholder value rises when a CEO's inside debt level moves closer to those at peer …rms with similar characteristics. However, without knowing why …rms deviated from their peers in the …rst place, this result is also di¢ cult to interpret.…”

Section: Evidencementioning

confidence: 77%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research. JEL-Codes: D310, D860, G340, M120. Terms of use: Documents in

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Section: Evidencementioning

confidence: 77%

Executive Compensation: A Survey of Theory and Evidence

Edmans¹,

Gabaix²,

Jenter³

2017

SSRN Journal

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“…Different from these studies,Campbell, Galpin, and Johnson (2015) examine the impact of CEO inside debt level change on equity value from an optimal contracting view and find that equity value increases as firms move towards the predicted optimal CEO inside debt level, consistent with the theoretical predictions inEdmans and Liu (2011).…”

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confidence: 54%

Two essays on corporate finance

Wang¹

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This dissertation includes two essays on corporate finance. The first essay investigates why bank debt contracts are frequently renegotiated outside default. I test empirical implications from several theories by looking at bondholder wealth effects in a sample of firms with both bank debt and public bonds in their capital structure. Based on a sample of 321 renegotiations, I find that bondholders react positively to renegotiations that result in relaxation of bank debt covenants. The evidence supports the theory that lenders loosen covenants due to new favorable information of firms' credit quality and is inconsistent with the hypothesis that relaxing covenants signals weakened bank monitoring due to low bargaining power of the banks. I also find insignificant bondholder reaction to renegotiated higher bank loan interest rates. This provides little support to the hypothesis that increased loan interest rate conveys unfavorable news that asset substitution cannot be avoided.The second essay, coauthored with Shane Johnson and Jun Zhang, examines the relationship between CEO inside debt and the maturity of new corporate debt. Following recent theories of incentive alignment effect of CEO inside debt, we include both the magnitude and the maturity of CEO inside debt in empirical estimation. We classify firms as having "debt-biased CEOs" when the ratio of CEO's inside debt to equity compensation exceeds the company's leverage ratio, and "equity-biased CEOs" otherwise. Using a sample of corporate debt issuance during 2007-2012, we find that among firms with long-term inside debt, firms with debt-biased CEOs issue debt with longer maturity than do firms with equity-biased CEOs. Among firms with debt-biased CEOs, the maturity of new debt is longer if CEOs have long-term inside debt than if CEOs have short-term inside debt.In contrast, among firms with equity-biased CEOs, the maturity of new debt is shorter if a CEO has long-term inside debt than if a CEO has short-term inside debt. The results ii provide support for the overall hypothesis that CEO inside debt affects firms debt maturity structure through its ability to ameliorate stockholder-debtholder conflicts.

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“…Our prior findings highlight that inside debt is positively associated with changes in debt value, but negatively associated with changes in equity value around acquisitions. Campbell et al (2016) adopt an optimal contracting view and suggest that investor reactions to CEO inside debt holdings may be conditional on the deviation of inside debt ratios from the optimal level.…”

Section: Do Deviations From An Optimal Level Of Ceo Inside Debt Levelmentioning

confidence: 99%

“…Our empirical setup involves estimating optimal inside debt ratios and examining which component (optimal or deviation) explains the value effects of M&A. We obtain the optimal inside debt ratios from the predicted values obtained by regressing inside debt on its determinants, following Campbell et al (2016). Results reported in Table 8 indicate that the deviation component of inside debt ratios explains the M&A value effects, with banks that have higher inside debt than optimal associated with more negative shareholder returns and positive bondholder returns.…”

Section: Here]mentioning

confidence: 99%

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Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions

Srivastav

Armitage

Hagendorff

et al. 2018

Journal of Financial Stability

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Article:Srivastav, A orcid.org/0000-0003-4831-4458, Armitage, S, Hagendorff, J et al.(1 more author) (2018) Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions. Journal of Financial Stability, 36. pp. 208-224. AbstractWidespread bank losses during the financial crisis have raised concerns that equity-based compensation for bank CEOs causes excessive risk-taking. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky acquisitions. Consistent with this, we show that acquisitions announced by CEOs with high inside debt incentives are associated with a wealth transfer from equity to debt holders. After the completion of a deal, banks where acquiring CEOs have high inside debt incentives display lower market measures of risk and lower loss exposures for taxpayers. JEL Classification: G21, G34, J33

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Optimal inside debt compensation and the value of equity and debt

Cited by 58 publications

References 20 publications

Executive Compensation: A Survey of Theory and Evidence

Executive Compensation: A Survey of Theory and Evidence

Two essays on corporate finance

Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions

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