Stockholder and Bondholder Wealth Effects of CEO Incentive Grants

Matthew T. Billett, David C. Mauer and Yilei Zhang

Financial Management, 2010, vol. 39, issue 2, 463-487

Abstract: We examine stock and bond price reactions to CEOs’ first stock option and/or restricted stock grants that appear on ExecuComp. We find positive stock price and negative bond price reactions. Changes in CEO pay‐performance (delta) and stock volatility (vega) sensitivities relate to the reactions. Stock reactions decrease with the change in delta and increase with the change in vega. Bond reactions are the opposite and depend on the CEO's prior equity ownership. Stockholder and bondholder wealth effects are negatively correlated for grants that cause a large change in the vega of CEO wealth, consistent with aggravated risk‐shifting incentives.

Date: 2010
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