Executive Compensation and Capital Structure: The Effects of Convertible Debt and Straight Debt on CEO Pay

Posted: 29 Sep 2006

See all articles by Hernan Ortiz-Molina

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Abstract

I examine how CEO compensation is related to firms' capital structures. My tests address the simultaneity of these decisions and distinguish between debt types with different theoretical implications for managerial incentives. Pay-performance sensitivity decreases in straight-debt leverage, but is higher in firms with convertible debt. Furthermore, stock option policy is the component of CEO pay that is most sensitive to differences in capital structure. The results strongly support the hypothesis that firms trade-off shareholder-manager incentive alignment in order to mitigate shareholder-bondholder conflicts of interest. The hypothesis that debt reduces manager-shareholder conflicts can explain some but not all of the results.

Keywords: Executive compensation, agency problems, capital structure

JEL Classification: G32, G34, J33, D82

Suggested Citation

Ortiz-Molina, Hernan, Executive Compensation and Capital Structure: The Effects of Convertible Debt and Straight Debt on CEO Pay. Journal of Accounting & Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=933334

Hernan Ortiz-Molina (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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