Equity Compensation and the Pricing of Syndicated Loans

Abstract

Drawing on theoretical research, I provide empirical evidence on the effect of managerial equity compensation on the pricing and ownership structure of syndicated bank loans. Equity compensation motivates managers to expropriate lenders' wealth and engage in aggressive investment behaviour. I hypothesize that bank syndicates anticipate these managerial actions when negotiating lending agreements and find evidence consistent with my predictions. Managerial equity compensation is associated with larger risk premiums in syndicated loan spreads after controlling for relevant loan and firm characteristics. In addition, loan agreements are structured to facilitate better bank monitoring ex post. Loan contracts require more restrictive covenants and the lead arranging banks retain larger shares in the loans.

Keywords: loans, syndicated loans, executive compensation, incentives, dealscan, propensity score matching