Feb 15, 2013
from 11:00 AM to 12:30 PM
|Where||Cambridge Judge Business School, W2.02|
|Contact Name||Laura Whitehead|
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“THE EFFECT OF THE CEO’s OPTION COMPENSATION ON THE FIRM’s CAPITAL STRUCTURE: A NATURAL EXPERIMENT”
Onur Tosun, Smith School of Business, University of Maryland
The empirical challenge in studying the relation between CEO option compensation and the firm’s capital structure decision is that these are both choices of the firm that are made simultaneously. Therefore, it is difficult to conclude from the existing literature the causation of this relation. Using the Internal Revenue Code (IRC) 162(m) tax law as an exogenous shock to the compensation structure in a natural experiment setting, I can identify now firm leverage changes as a result of the CEO option compensation changes. The evidence in this paper provides strong support for the debt agency theory. The results indicate that CEOs raise less debt when they are paid with more option grants and as those options become a higher percentage of the firm’s future cash flows. The findings are robust to addition of corporate governance and convertible debt dimensions to estimation. The results clarify the conflicting evidence previously documented in the literature and provide guidance to compensation committees as to how CEO compensation impacts firm leverage.