Accounting-Based Compensation Plans and Corporate Debt Contracts

Abstract

We investigate how the recent change to incorporate accounting-based performance measures in compensation design influences corporate debt contracts. We find that firms granting long-term accounting-based incentive plans (LTAPs) to their CEOs are subsequently able to secure new bank loans with lower spreads and fewer restrictive covenants than other firms. Our findings are concentrated among firms with high leverage, high bankruptcy risk, and firms that lenders find difficult to monitor. Our results are robust when using alternative measures of borrowing costs (spreads for newly issued public bonds and changes in credit ratings and CDS spreads). Overall, our findings suggest that LTAPs help mitigate potential conflicts of interest between shareholders and debtholders.