An Empirical Study on the Relationship Between CEO Pay Duration and Credit Rating

• Main Authors: Hong-Ling Lai, 賴虹伶
• Other Authors: 李艷榕
• Format: Others
• Language: zh-TW
• Published: 2017
• Online Access: http://ndltd.ncl.edu.tw/handle/g4gbq7

碩士 === 國立臺灣大學 === 會計學研究所 === 106 === One of the most widely discussed topics in the academic literature concerns how to appropriately structure an optimal executive compensation to mitigate agency problems. Prior literature does not provide a measure to quantify executive pay duration, which refers to the average period that it takes for managers’ annual compensation to vest. Using the executive pay duration measure developed by Gopalan et al. (2014), this study examines the relation between the executive pay duration and the firm’s credit rating. I expect that when the CEO is given a longer pay duration, the CEO is less likely to be short-term oriented, and he/she will have fewer incentives to manage the firm’s short-term performance. Gopalan et al. (2014) shows that when the company provides its CEO with a longer the pay duration contract, the company exhibits firm characteristics associated with better debt-paying abilities. Therefore, I predict that firms granting longer executive pay duration have better credit ratings. Moreover, better-governed firms have less need to offer longer-duration pay contracts to alleviate CEO myopia behavior and to mitigate agency problems, I expect that strong corporate governance weakens the effect of CEO pay duration on credit ratings. Using a sample of listed companies in the U.S. from 2006 to 2015, I find that when firms grant their CEO longer-duration pay contracts, they receive better credit ratings. This result is positive and significant, supporting my first hypothesis. The effect of CEO pay duration not only has a statistical significance, but also exhibits economic significance. However, the empirical result of my second hypothesis is not consistent with my prediction. I use two proxies of firm governance, (1) nonexecutive director’s shareholding (NDSH); and (2) entrenchment index (EI). The result of NDSH is opposite to my prediction, suggesting that better-governed does not weaken the effect of CEO pay duration on credit rating. This empirical result doesn’t support the substitute relationship between corporate governance and duration pay contract. Using EI to proxy for corporate governance does not yield significant result.