Executive risk-taking and the agency cost of debt

Firms compensate managers to maximize shareholder value, yet these same incentives affect bondholder risk. We investigate the relation between executive equity pay and the cost of debt. Our findings indicate a "u-shaped"relation between bond yields and equity pay. These results are consistent with the notion that bondholders prefer a moderate amount of executive equity pay and above or below that level, bondholders increase yields to protect their interests. These findings suggest that moderate levels of equity pay mitigate the agency costs between firm shareholders and bondholders.