Journal of Applied Finance & Banking

How Does CEO Equity-based Compensation Affect Firmís Propensity of Issuing New Securities?

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  • Abstract 

    CEO equity-based compensation is designed to reduce the agency problem between top management and shareholders, which should have direct consequences on firmís capital structure decisions as evidenced by the behaviors of new security issuances. This research paper focuses on the impact on the propensity of issuing new securities by two common CEO equity-based compensations Ė option compensation and restricted stock compensation. Empirical results show that CEO option compensation yields statistically significant evidences that it will lower firmís propensity of SEO issuance and debt issuance. However, it has no direct effect on firmís preferred stock issuance. On the other side, CEO restricted stock compensation has only statistically significant and negative impact on firmís propensity of SEO issuance. Moreover, CEO option compensation has much higher estimated marginal effects in absolute value on SEO issuance than CEO restricted stock compensation does.

    JEL classification numbers: G32; G34
    Keywords: CEO Equity-based Compensation, Option Compensation, Restricted Stock Compensation, SEO Issuance, Preferred Stock Issuance, Debt Issuance