Executive Stock Ownership Guidelines and Debtholder Wealth

Abstract

ABSTRACT We examine how the adoption of executive stock ownership guidelines affects debtholder wealth. We find that guideline adoption is associated with lower loan spreads, fewer collateral requirements, and fewer other restrictive covenants. The results are robust to using an instrumental variables approach. We further find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms' risk-taking incentives are lower. These results suggest that guideline adoption benefits debtholders by lowering agency costs of debt. However, we also find that adoption of ownership guidelines is associated with a significant increase in stock prices, and that firms are more likely to increase financial reporting quality in the post-adoption period, indicating that guideline adoption incentivizes managers to improve firm fundamentals, benefiting both shareholders and debtholders. JEL Classifications: G21; G32; M12; M41.