CEO-Employee Pay Ratio and Bond Yield Spreads
Links to Fileshttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=3109430
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Type of Work41 pages
Citation of Original PublicationHuang, Guan-Ying and Huang, Henry Hongren and Yu, Jerry, CEO-Employee Pay Ratio and Bond Yield Spreads (January 25, 2018). Asian Finance Association (AsianFA) 2018 Conference. Available at SSRN: https://ssrn.com/abstract=3109430 or http://dx.doi.org/10.2139/ssrn.3109430
This 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.