CEO Compensation and Credit Risk
نویسنده
چکیده
We examine the empirical relationship between executive compensation and credit risk. For each of the three major components of CEO compensation – salary, bonus, and stock option awards – we derive estimates of “unexplained” compensation as pay that deviates substantially from expected pay based on firm size, past performance, and other variables. We then relate these measures of unexplained compensation to the risk of default and large rating downgrades between 1993 and 2003. After controlling for a variety of firm characteristics, including industry effects and long-term ratings, we find that large, positive, unexplained bonus and option awards are predictive of both default and large rating downgrades. Variations in salaries, however, do not appear to be predictive of credit risk. JEL Codes: G14, G33, G34
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