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Item CEO-Employee Pay Ratio and Bond Yield Spreads(Social Science Research Network, 2018-01-25) Huang, Guan-Ying; Huang, Henry H.; Yu, JerryThis study explores the effect of CEO-employee pay ratio on bond yield spreads. We find that there exists a positive relation between CEO-employee pay ratio and bond yield spreads. Since bond yield spread has been used as a proxy for a corporation’s cost of debt, our finding suggests that bondholders tend to perceive a higher CEO-employee pay ratio as a risk factor, therefore requiring a higher return from the debt, thus the higher cost of debt. We further analyze how industrial homogeneity and labor unionization, which proxies for employee’s bargaining power, affects such a relation and find that employee’s bargaining power plays a mitigating role on the effect of CEO-employee pay ratio on bond yield spreads. Finally, we investigate how such a relation is affected by a firm’s financial constraints. The result shows that the effect of CEO-employee pay ratio on bond yield spreads tends to be more pronounced when the firm has a higher level of financial constraints.