Journal of Financial and Quantitative Analysis

Research Article

Top Management Incentives and the Pricing of Corporate Public Debt

Hernan Ortiz-Molinaa1

a1, Sauder School of Business, The University of British Columbia, 2053 Main Mall, Vancouver, BC Canada V6T 1Z2.


This article examines managerial ownership structure and at-issue yield spreads on corporate bonds. There is a positive relation between managerial ownership and borrowing costs, and this relation is weaker at higher levels of ownership. In addition, managerial stock options have a larger effect on yield spreads than stock ownership. These effects exist after controlling for firm and bond characteristics, and are robust to endogeneity and sample selection concerns. The evidence suggests that rational bondholders price new debt issues using the information about a firm's future risk choices contained in managerial incentive structures, and that lenders anticipate higher risk-taking incentives from managerial stock options than from equity ownership.