Managerial Incentives and the Choice between Public and Bank Debt

I propose a simple model with complete and perfect information on the relation between managerial incentive compensation and choice between public and bank debt. The empirical analysis offers considerable support to the model's predictions. I find that managers whose compensation is tied to firm performance prefer bank to public debt. Further, I find a positive relation between cost of public debt and managerial incentive compensation and no relation between loan spreads and incentive compensation. Finally, I find that banks are more likely to include a collateral provision in the debt contract if the CEO's compensation is tied to firm performance. (C) 2011 Elsevier B.V. All rights reserved.