Accounting-Based Compensation and Debt Contracts

Zhi Li, Lingling Wang and Karen H. Wruck
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Zhi Li: Chapman University
Lingling Wang: University of Connecticut
Karen H. Wruck: Ohio State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Adding accounting-based performance plans to management compensation packages influences borrowing costs and structure of corporate debt contracts. After granting long-term accounting-based incentive plans (LTAPs) to CEOs, firms pay lower spreads and have fewer restrictive covenants in new loans. Lenders impose fewer earnings-based covenants after firms adopt earnings-based LTAPs. Results are stronger for firms with high leverage or bankruptcy risk, and that are difficult for lenders to monitor. Results are robust to alternative borrowing cost measures, including new public bond spreads, credit ratings, and CDS spreads. Overall, evidence suggests that adding LTAPs to compensation packages helps align debtholder and shareholder interests.

JEL-codes: G30 J33 M41 M52 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cfn and nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2017-07

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