Executive Stock Ownership Guidelines and the Agency Cost of Debt

Abstract

We examine how the adoption of executive stock ownership guidelines affects the agency cost of debt. 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 firm fixed effects, instrumental variables, and difference-in-differences estimation approaches. We also find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms’ risk-taking incentives are lower and the quality of their financial reporting is higher. Thus, guideline adoption has a real impact on managerial incentives to reduce the agency cost of debt.