Performance Contingencies in CEO Equity Awards and Debt Contracting
Bizjak, John M., Kalpathy, Swaminathan L., Mihov, Vassil T.
The Accounting Review · 2019 · Volume 94 · Issue 5
Abstract
We find that firms that grant performance-contingent (p-c) equity awards with accounting-based vesting conditions to their CEOs have lower cost of debt and less restrictive loan terms. The benefits of p-c accounting-based awards on debt financing are greater when the moral hazard problem faced by debtholders is potentially more significant—for example, for firms with poorer credit ratings and lower asset tangibility. We find some evidence that certain types of p-c equity awards with stock price-based conditions increase the cost of debt financing. The adoption of p-c accounting-based awards increases firm value, as indicated by stock and bond event studies. Overall, our findings suggest that the incentive compatibility of accounting-based p-c awards mitigates the potential agency conflict between shareholders and debtholders. JEL Classifications:G32; G34; J33; M12; M52.
Keywords
performance-vesting awards, performance-contingent awards, executive compensation, CEO pay, executive stock options, agency costs of debt, financial contracting, capital structure, cost of debt, loan covenants
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