Is executive compensation a substitute governance mechanism to debt financing and leasing?

Minhat, Marizah; Dzolkarnaini, Nazam

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.

Citation

Minhat, M., & Dzolkarnaini, N. (2016). Is executive compensation a substitute governance mechanism to debt financing and leasing?. Applied Economics, 48(14), 1293-1302. https://doi.org/10.1080/00036846.2015.1100247

• Journal Article Type: Article
• Acceptance Date: Dec 31, 2015
• Online Publication Date: Oct 22, 2015
• Publication Date: Mar 21, 2016
• Deposit Date: Oct 30, 2015
• Publicly Available Date: Apr 23, 2017
• Journal: Applied Economics
• Print ISSN: 0003-6846
• Electronic ISSN: 1466-4283
• Publisher: Routledge
• Peer Reviewed: Peer Reviewed
• Volume: 48
• Issue: 14
• Pages: 1293-1302
• DOI: https://doi.org/10.1080/00036846.2015.1100247
• Keywords: Executive compensation; CEO pay; CEO incentives; Capital structure; Debt; Leasing; Corporate governance
• Public URL: http://researchrepository.napier.ac.uk/id/eprint/9250
• Publisher URL: http://dx.doi.org/10.1080/00036846.2015.1100247