Abstract
Managerial compensation theory suggests that both equity- and debt-type compensation should be included in the optimal compensation contract in order to align managers’ interests with both shareholders and debt-holders of the firm. However, this also suggests that these two forms of compensation are directly in conflict with each other in that shareholders (debt-holders) should react negatively to debt-type (equity-type) compensation. In this paper, we consider how firm insiders react to CEO debt-type compensation by examining insider trading. We find that higher CEO debt-type compensation is associated with net purchasing of shares by firm insiders. This finding is robust to using both a ratio and a flow measure of insider trading as well as various measures of debt-type compensation. Our results suggest that well-informed insiders perceive debt-type compensation to provide a positive benefit to shareholders.
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