Executive compensation and secured debt: Evidence from REITs

Ying Li, Lingxiao Li, Bing Zhu

Research output: Contribution to journalArticlepeer-review

Abstract

This paper explores the impact of executive compensation structure on firm debt choices. To analyze the relationship between executive compensation and firm debt structure via the managerial effort channel, we extend the theoretical model developed by Boot et al. (1991) by incorporating an agent-principal model. We employ data from US Equity Real Estate Investment Trusts (REITs) to empirically assess the model's implications. The evidence presented in this study reveals that when executive compensation exhibits a higher sensitivity to the firm's stock price (represented by a higher Delta), the firm tends to use a greater proportion of secured debt within its overall debt structure. This phenomenon can be attributed to the managerial effort channel: firms with higher Delta values tend to engage in investments that are more effort-sensitive, and these investment choices are positively associated with increased utilization of secured debt, where the collateral plays the role of incentivizing the manager to put more effort into projects – an “effort-lifting” behavior. These findings hold for an expanded sample consisting of firms from all industries. Our analysis offers a fresh perspective on the use of collateral and executive compensation as a tool to mitigate principal-agent problems.

Original languageEnglish
Article number102727
JournalJournal of Corporate Finance
Volume91
DOIs
StatePublished - Apr 2025

Keywords

  • Debt structure
  • Executive compensation
  • Managerial effort
  • REITs
  • Secured debt

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