Is Executive Compensation a Substitute Governance Mechanism to Debt Financing and Leasing?

42 Pages Posted: 17 Jun 2017

See all articles by Marizah Minhat

Marizah Minhat

Edinburgh Napier University; Edinburgh Napier University

Nazam Dzolkarnaini

University of Salford - Salford Business School

Date Written: September 23, 2015

Abstract

This study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity.

Keywords: Executive Compensation, CEO Pay, CEO Incentives, Capital Structure, Debt, Leasing, Corporate Governance

JEL Classification: G32, G34, J33, M52

Suggested Citation

Minhat, Marizah and Minhat, Marizah and Dzolkarnaini, Nazam, Is Executive Compensation a Substitute Governance Mechanism to Debt Financing and Leasing? (September 23, 2015). Applied Economics, Vol. 48, No. 14, 2016, pp.1293-1302, Available at SSRN: https://ssrn.com/abstract=1650298

Marizah Minhat

Edinburgh Napier University

School of Accounting, Economics and Statistics
Craiglockhart Campus
Edinburgh, Scotland EH14 1DJ
United Kingdom

Edinburgh Napier University ( email )

Edinburgh, EH10 5LG
United States

Nazam Dzolkarnaini (Contact Author)

University of Salford - Salford Business School ( email )

University of Salford
The Crescent
Salford, Greater Manchester M5 4WT
United Kingdom
+44 (0) 161 295 2535 (Phone)
+44 (0) 161 295 5022 (Fax)

HOME PAGE: http://business.salford.ac.uk/staff/nazamdzolkarnaini

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