Securitization of corporate assets and executive compensation

We examine the effect of corporate asset-backed securitization on managerial compensation. We find that CEO compensation increases after securitization of corporate assets, which is consistent with two distinct theoretical views: (1) asset-backed securitization improves the efficiency of performance-based compensation as corporate performance becomes a better signal of managerial effort and (2) securitization of corporate assets mitigates liquidity constraints so that firms can make more efficient investments. We find that securitization primarily affects short-term accounting components (bonuses) and less equity-based components of the CEO's performance-based compensation. Further investigation reveals support for the second view of liquidity but not the first view of moral hazard. The results are robust to controlling for both possible self-selection biases associated with the decision to rely on asset-backed securitization as a means of external financing and simultaneity between executive compensation and financial decisions (securitization and leverage). (C) 2013 Elsevier B.V. All rights reserved.