The relevance of executive equity compensation design in loan pricing decisions: evidence from private loans

Emrah Ekici, Marina Y. Ruseva and Sai Harsha Katuri

International Journal of Managerial Finance, 2025, vol. 21, issue 4, 1061-1085

Abstract: PurposeThis paper examines whether and how executive equity compensation design is factored into loan pricing decisions of private lenders. Specifically, the authors study the association between the relative proportion of the two main components of executive equity compensation, options and stock awards and the loan spread.Design/methodology/approachThe study utilizes a sample of syndicated bank loans issued to S&P 1500 firms over the period 2007–2017. The empirical results are supported by multivariate analyses, controlling for known determinants of loan contract terms. The authors provide additional evidence that these results are robust to correcting the possible endogeneity in two ways: (1) two-stage least squares regression is utilized using instrumental variables and (2) changes in loan spread are examined in response to intertemporal changes in executive equity compensation design.FindingsThe empirical findings indicate that private lenders assess the differential riskiness of the two equity compensation components in determining the loan spread. Specifically, a greater proportion of options in executives’ equity compensation is associated with a higher loan spread. The results also suggest that firms compensating their executives with a greater proportion of stock relative to the proportion of options benefit from a lower loan spread.Originality/valueUnlike prior research, this paper uses a single firm measure to capture the relative weight of the two main equity compensation components granted to firm executives. To the best of the authors’ knowledge, this is the first study to analyze the joint effect of options and stock awards included in executives’ compensation on firm lending costs.

Keywords: Executive equity compensation design; Equity compensation components; Lending costs; Loan spread; S&P 1500 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-05-2024-0262

DOI: 10.1108/IJMF-05-2024-0262

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