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

Minhat, Marizah; Dzolkarnaini, Nazam

Authors

Marizah Minhat

Nazam Dzolkarnaini



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.

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
Contract Date Oct 30, 2015

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