Do Higher Paid CEOs Weather
the Storm Better?
Evidence from the Great
Recession
Wei-Ling Song
Hsiangping Tsai
E.J. Ourso College of Business
Louisiana State University
College of Management
Yuan Ze University
1
Motivation & Background

The collapse of Lehman Brothers


Shareholder’s reaction


The say-on-pay rules in the Dodd-Frank legislation
Kaplan (2011): Shareholders support
 More than 98% of S&P 500 firms
Some academic view (empirical evidence)

Agency problem → CEOs are overpaid

Bebchuk et al. (2011): CPS (CEO pay slice) is negatively
correlated with firm value (Tobin’s Q), accounting
profitability, acquisition announcement returns, and
performance sensitivity of CEO turnover.
2
Bebchuk et al. (2011)
CEO Pay Slice (CPS)

Definition


The fraction of the aggregate compensation of the firm’s
top-five executive team captured by the CEO.
CPS negatively correlated with Tobin’s q

Optimal selection explanation:


The optimal level of CPS or the relative importance of
the CEO could be higher for lower value firms
Agency problem explanation:

High excess CPS reflects agency problems, which
bring about the identified pattern between lower firm
value and higher CPS.
3
Our Main Idea

CPS (Excessive CEO pay) may proxy for




Agency problem
Tournament effect
Unobserved CEO ability
CEOs with better capacity to navigate through a
difficult environment are likely to be paid higher
even though firm value and profitability appear
to be similar to other type of firms during normal
times.

During tough times, high CPS firms perform better
4
Main Results

High CPS firms experienced




A significantly lower increases in CDS spread around the
Lehman Crisis
Lower declines in firm value (Tobin’s Q) during the Great
Recession
Better outside financing opportunities: Better public debt
access/Less deterioration in credit ratings
Our results are consistent with the CEO ability
hypothesis
5
CEO Compensation & CEO ability

Two views

Managerial rent extraction (agency problem)


Bebchuk and Grinstein (2005), Bebchuk et al.
(2011), Liu and Jiraporn (2010)
Market-based (efficient contracting)




Frydman and Saks (2010)
Rosen (1981), Rossi-Hansberg (2006), Gabaix and
Landier (2008)
Murphy and Zabojnik (2007): managerial ability vs.
firm-specific human capital
Kapalan and Rauh (2010)
6
Credit Default Swaps (CDS)

Credit Default Swap (CDS)


Allows for one party transfers the default risk
of a reference entity (or a firm) to another by
paying an annual premium during the term
of the contract.
CDS spread


quoted in basis points
Information about the market perception of
credit condition for a firm
7
Why examine CDS spreads

The benefit of CEO high ability (to weather storm
during crisis) is more likely to be captured by
creditors

CDS contracts are actively traded


Price info more reliable than thinly traded bonds or loans
CDSs are traded by large sophisticated
institutions

Information-efficiency (CDS spreads vs. stock prices)
 Acharya and Johnson (2006): a information flow from
CDS market to the equity market
8
The value implication
during crisis

CDS: wealth effect of creditors


Tobin’s Q: wealth effect of equity holders


Residual claimants: the value implication is unclear
CEO ability hypothesis



If higher ability CEO can manage the exogenous
shock better, creditors may benefit.
High CPS firms → lower CDS spread increases
High CPS firms → lower declines in Tobin’s q
Agency problem hypothesis


High CPS firms → higher CDS spread increases
High CPS firms → higher declines in Tobin’s q
9
Alternative explanation (1)
Agency problem: High CPS CEO take low risk

Value implication of agency problems to creditors
and shareholders

Agency cost of debt: lower value for creditors
 Manager actions benefit shareholders at the expense
of debt holders

Conflict of interests between managers and shareholders
 Value destruction/high CPS firms taking more risk
→ harmful for both creditors and shareholders
 Bebchuk et al (2011)
 Lower risk taking: managers choose lower risk
projects → enhance creditor’s value
 inconsistent with Liu and Jiraporn (2010)
10
Alternation explanation (1)
Agency problem: High CPS CEO take low risk

CEO’s low risk taking agency problem

Control for CEO risk taking incentive


Wei and Yermack (2011): inside debt variables
Examine Tobin’s Q

How shareholder view firms with different levels of
CPS throughout the crisis? High → rule out the low
risk taking
11
Alternation explanation (2)
Tournament effect

Tournament Effects

Kale et al. (2012): positive competition among
VPs contributes to higher values.

Based on Murphy (1999), the level and structure of
managerial compensation are driven by size and
industry.
 Tournament size is likely to be similar within an
industry.

To net out the tournament effect

Use Industry-adjusted CPS
12
Sample selection

CDS spread

Senior 5-year term CDS quotes

ExecuComp & IRRC (CG data)

Final sample: 407 firms


Following Bebchuk et al.(2011)
 CEO tenure>=1 year
 Firms reporting top 5 executive compensation
332 industrial firms and 75 financial firms
13
Sample distribution
All sample
All
Low
No. of Obs.
407
203
Panel A. Industry classification (one-digit SIC code)
(0) Agriculture, Forestry, and Fishing
0.01
0.01
(1) Mining, oil and gas, construction
0.08
0.07
(2) Non durables manufacturing
0.20
0.20
(3) Durables manufacturing
0.16
0.18
(4) Transport and communication
0.19
0.17
(5) Wholesale and retail trade
0.11
0.11
(6) Financial services
0.18
0.20
(7) Services
0.06
0.05
(8) Health services
0.02
0.00
Panel B. S&P credit rating
AAA and AA
0.07
0.06
A
0.25
0.24
BBB
0.39
0.36
BB
0.17
0.22
B
0.09
0.09
CCC and CC
0.00
0.00
Non-rated
0.02
0.01
Mean
Mean
Credit rating score
9.21
9.30
High
204
Industrial firms
All
Low
332
163
0.00
0.09
0.21
0.13
0.20
0.10
0.17
0.06
0.03
0.01
0.10
0.25
0.19
0.23
0.13
0.00
0.07
0.02
0.01
0.09
0.25
0.23
0.21
0.13
0.01
0.11
0.25
0.16
0.24
0.12
0.07
0.01
0.07
0.04
0.07
0.26
0.41
0.12
0.10
0.00
0.03
Mean
9.12
0.05
0.23
0.37
0.20
0.11
0.00
0.03
Mean
9.70
0.04
0.21
0.35
0.26
0.11
0.01
0.02
Mean
9.80
0.05
0.25
0.40
0.14
0.12
0.00
0.04
Mean
9.61
High
169
14
Variables

CPS (CEO pay slice)



High vs. low CPS firms


the fraction of the total top five executives’
compensation that goes to CEO.
Total Compensation (TDC1)
High: Firms with above median ind-adj CPS during the
fiscal year prior to the Lehman Crisis
Governance variables

Bebchuk et al. (2011)
15
Variables (continued)

Risk characteristics


CEO inside debt variables (Wei and Yermack 2011)
Delta and vega (Core and Guay 2002)





Delta: $ change in the value of equity related holdings/grants for a
1% change in the stock price
Vega: $ change in the value of option holdings/grants for a 0.01
change in the annualized standard deviation of stock returns
Asset risk characteristics: Ind-adj cash flow volatility
(Parrino and Weisbach 1999)
Stock return risk: market beta
Spillover effects from the financial industry: Stock return
co-movements of firms and financial industry
16
Median CDS spread by CPS
17
Time-line for event windows
18
CDS spreads
by CPS type and by event window
(1) Prior to event
N Mean
(2) Following event
Med
N Mean
Med
Difference: (2)-(1)
N Mean
Med
Panel A: Low CPS firms
Subprime Crisis
141
94.8
43.5
141 117.5
43.6
Bear Crisis
144 338.8
136.5
157 332.5
134.0
Lehman Crisis
146 354.7
137.4
148 427.5
161.4
**
**
141
22.6
4.9
**
143
-11.9
-11.3
**
145
66.0
**
13.5
Panel B: High CPS firms
Subprime Crisis
138
74.5
40.1
Bear Crisis
144 282.7
Lehman Crisis
153 239.4
137
91.8
41.0
137
17.8
4.4
125.7
157 262.3
112.1
144
-8.3
-10.3
123.9
152 268.1
140.3
151
26.9
11.4
19
*
Summary statistics by CPS types
-fiscal year prior to the Lehman Crisis
Low CPS firms High CPS firms
Mean Median Mean
Median
CEO and executive compensation
CEO pay slice (CPS)
Industry-adjusted CPS
Total CEO compensation ($mil)
Relative equity compensation
Sum of top 5 compensation ($mil)
Log abnormal top 5 compensation
0.34
-0.06
8.94
1.32
26.23
0.08
0.35 0.48 ***
-0.03 0.09 ***
6.69 13.74 ***
1.08 1.22
21.33 28.26
0.07 0.18 *
0.46 ***
0.06 ***
9.81 ***
1.22 ***
21.00
0.18 **
20
Summary statistics by CPS types
-fiscal year prior to the Lehman Crisis
Low CPS firms High CPS firms
Mean Median Mean
Median
Risk taking incentive variables
Inside debt-equity ratio
0.13
0.01
0.10
0.01
Relative debt-equity ratio
0.40
0.06
0.40
0.03
Relative incentive ratio
0.28
0.04
0.28
0.03
Delta ($000s)
1,280.37 247.50 16,339.25 355.11 *
Vega ($000s)
1,187.15 503.78 1,251.94 810.34 *
Cash flow volatility
1.79
0.24
0.48
0.27
Industry-adjusted cash flow volatility
1.19 -0.06
-0.24
-0.10 **
Market beta
1.09
1.01
1.03
1.00
Co-movement with financial industry
0.88
0.79
0.83
0.74
21
Summary statistics by CPS types
-fiscal year prior to the Lehman Crisis
Low CPS firms High CPS firms
Mean Median Mean Median
Governance variables
E-index
2.96
Insider ownership (%)
1.72
Insider ownership^2
27.11
Company age
35.81
Log company age
3.32
CEO age
55.54
=1 if CEO is founder
0.09
=1 if CEO ownership>=20% 0.01
CEO tenure (years)
6.30
=1 if outside CEO
0.12
=1 if CEO is Chair
0.69
=1 if CEO is only director
0.38
3.00
0.00
0.00
35.00
3.56
56.00
0.00
0.00
5.09
0.00
1.00
0.00
3.11
1.83
41.99
38.21
3.39
55.75
0.14
0.02
6.73
0.12
0.69
0.54 ***
3.00
0.00
0.00
36.00
3.58
56.00
0.00
0.00
4.92
0.00
1.00
1.00 ***
22
Summary statistics by CPS types
-fiscal year prior to the Lehman Crisis
Firm characteristics
Tobin's Q
Industry-adjusted Tobin's q
Total assets (TA; $bn)
log Total assets
Market value of equity ($bn)
Cash/TA (%)
Net working capital/TA (%)
Current ratio
Long-term Debt/TA (%)
Debt due in 1 year/TA (%)
Capex/TA (%)
R&D/sales (%)
=1 if R&D missing
Collateral/TA (%)
Dividend payout (%)
ROA (EBIT/TA; %)
Industry-adjusted ROA (%)
One-year stock returns (%)
One-year stock returns - value adj. (%)
One-year stock returns - eq. adj. (%)
Low CPS firms
Mean Median
High CPS firms
Mean
Median
1.67
0.07
26.56
9.51
28.25
7.67
8.60
1.41
28.60
1.89
5.36
2.04
0.47
45.18
15.70
8.78
4.70
0.41
-4.94
4.80
1.74
0.16
19.21 *
9.42
21.94
7.32
7.39
1.35
25.91
1.79
6.22
2.42
0.49
46.34
11.35
10.29 *
6.17
8.30 **
1.61 *
11.98 *
1.47
0.00
11.76
9.37
9.01
4.97
6.49
1.28
25.34
1.02
4.28
0.00
0.00
43.21
7.93
8.91
1.06
-2.38
-4.82
5.49
1.51
0.05
11.90
9.38
10.49
5.05
5.02
1.22
24.33
0.73
4.86
0.00
0.00
45.55
8.63
9.90
2.97 ***
6.61 **
-0.53 **
9.60 **
23
Change in CDS spread surrounding the
Crises
Dependent variable:
Change in CDS spread
Ind-adj CPS
Ind-adj Tobin's Q
E-index
Log total assets
Insider ownership (%)
Insider ownership^2
ROA (EBIT/TA; %)
Capex/TA (%)
Long-term debt/TA (%)
R&D/Sales (%)
=1 if R&D missing
Log company age
=1 if CEO is founder
Abnormal total compensation
Relative equity compensation
=1 if CEO ownership>=20%
CEO tenure (years)
Diversified
=1 if outside CEO
=1 if CEO is Chair
=1 if CEO is only director
(1) Subprime Crisis
(2) Bear Crisis
Coef.
t-test
Coef. t-test
-10.44
-0.66
6.17 0.15
1.96
0.82
0.28 0.04
0.35
0.30
-0.33 -0.12
-1.63
-0.88
5.69 1.22
-0.68
-0.55
-0.31 -0.16
*
0.12
1.94
-0.01 -0.21
**
-0.70
-2.53
1.19 1.45
***
-1.00
-3.02
-0.37 -0.37
**
0.32
2.51
-0.29 -0.90
-0.09
-0.39
-0.11 -0.12
5.99
1.36
-17.72 -1.49
-2.78
-1.17
5.20 0.92
*
-12.46
-1.65
25.63 1.29
**
7.09
2.08
-5.83 -0.66
-0.78
-0.51
-0.18 -0.04
**
-70.40
-2.57
14.37 0.23
0.29
0.89
0.11 0.13
-1.27
-0.11
31.13 0.97
***
-13.88
-2.84
-0.27 -0.02
-0.48
-0.13
6.76 0.68
**
7.39
2.15
3.70 0.44
(3) Lehman Crisis
Coef. t-test
-169.59 -2.27 **
9.88
0.78
4.24
0.81
9.92
1.18
-7.31 -1.40
0.28
1.26
-2.81 -2.13 **
2.66
1.70 *
0.21
0.36
0.26
0.17
13.75
0.66
-3.99 -0.40
37.72
1.10
10.45
0.65
11.99
2.04 **
-42.35 -0.37
0.19
0.12
-12.55 -0.22
38.20
1.82 *
-36.48 -2.13 **
*
-28.39 -1.93 24
Change in CDS spread: Lehman Crisis
(control for CEO risk-taking)
Dependent variable:
(1)
(2)
(3)
Change in CDS spread
Coef. t-test
Coef.
t-test
Coef.
t-test
Panel B: Control for CEO risk-taking incentive surrounding the Lehman Crisis
Ind-adj CPS
-169.84 -2.26 ** -192.46 -2.09 ** -188.32 -2.04
Ind_adj Tobin's Q
4.33
0.34
13.74
0.84
13.48 0.82
E-index
2.59
0.49
2.00
0.32
1.68 0.27
Log total assets
6.44
0.67
3.96
0.36
3.37 0.30
Insider ownership (%)
-8.62 -1.60
-11.27 -1.60
-11.33 -1.61
Insider ownership^2
0.36
1.56
0.52
1.44
0.52 1.46
*
**
ROA (EBIT/TA; %)
-2.54 -1.73
-3.64 -2.13
-3.50 -2.02
*
=1 if CEO is founder
43.84
1.26
103.20
1.83
104.68 1.85
Abnormal total compensation
9.48
0.57
11.59
0.60
11.46 0.59
**
Relative equity compensation
15.01
2.46
4.42
0.47
5.60 0.58
=1 if CEO ownership>=20%
-91.86 -0.76
-178.11 -1.00
-181.97 -1.02
CEO tenure (years)
-0.61 -0.35
-0.89 -0.45
-0.98 -0.50
**
*
=1 if outside CEO
42.82
2.02
41.29
1.72
41.43 1.72
**
**
=1 if CEO is chair
-39.51 -2.29
-50.92 -2.50
-51.40 -2.52
**
=1 if CEO is only director
-30.37 -2.02
-27.67 -1.59
-27.33 -1.57
*
*
Market beta
140.88
1.70
187.81
1.93
191.86 1.96
Co-movement with FIN industry -113.65 -1.19
-154.38 -1.39
-157.93 -1.41
Inside debt-equity ratio
26.35 0.60
-1
Delta*10
0.04
0.42
0.02
0.15
0.02 0.16
Vega*10-1
0.02
0.25
0.03
0.37
-0.09
-0.08
0.03
0.42
-0.05 -0.04
**
**
*
*
**
**
25
Change in Tobin’s q surrounding the
Lehman Crisis
Dependent variable:
Industry adjusted Tobin's Q/Changes in
industry adjusted Tobin’s Q
Ind-adj CPS or CPS
Ind-adj Tobin's Q
E-index×10-1
Log total assets
Insider ownership
Insider ownership^2
ROA (EBIT/TA)
Capex/TA
Long-term debt/TA
R&D/Sales
=1 if R&D missing
Log company age×10-1
=1 if CEO is founder
Abnormal total compensation
Relative equity compensation×10-2
=1 if CEO ownership>=20%
CEO tenure (years) ×10-2
Diversified
=1 if outside CEO
=1 if CEO is Chair
=1 if CEO is only director×10-1
(1) Replicating Bebchuk (2) Replicating Bebchuk (3)FY2009-FY2007 (4)FY2009-FY2007
Ind-adj CPS
CPS
Ind-adj CPS
CPS
Coef.
t-test
Coef.
t-test
Coef.
t-test
Coef. t-test
-0.17
0.68
-0.08
0.00
0.97
-1.21
3.22
-0.02
-0.36
0.22
-0.06
-0.30
-0.05
0.01
-0.03
-0.01
0.09
-0.21
0.02
-0.01
-1.21
24.68 ***
-0.94
-0.05
1.08
-1.51
5.31 ***
-0.09
-2.12 **
0.44
-1.42
-1.26
-0.66
0.19
-0.21
-0.06
0.36
-1.35
0.51
-0.27
-0.10
0.68
-0.08
0.00
1.00
-1.23
3.22
-0.02
-0.36
0.22
-0.06
-0.29
-0.05
0.01
-0.04
-0.02
0.08
-0.21
0.02
-0.01
-0.81
24.60 ***
-0.96
-0.09
1.10
-1.52
5.30 ***
-0.10
-2.11 **
0.44
-1.43
-1.23
-0.64
0.15
-0.31
-0.07
0.34
-1.35
0.47
-0.31
0.47
-0.45
-0.04
-0.04
-0.09
3.56
0.39
0.15
0.22
-1.84
-0.07
0.03
-0.08
-0.02
0.10
-0.26
-0.30
0.09
-0.01
-0.06
0.03
2.23 **
-12.00 ***
-0.25
-1.58
-0.09
1.26
0.98
0.34
1.33
-4.51 ***
-1.18
0.09
-0.82
-0.37
0.05
-1.08
-0.65
0.45
-0.22
-1.27
0.06
0.29 1.45
-0.44
-0.02
-0.04
-0.15
3.78
0.40
0.15
0.21
-1.78
-0.07
0.04
-0.08
-0.01
0.33
-0.26
-0.28
0.08
-0.02
-0.06
0.04
-11.77 ***
-0.15
-1.58
-0.15
1.33
0.98
0.33
1.26
-4.34 ***
-1.20
0.12
-0.78
-0.25
0.18
-1.07
-0.60
0.38
-0.26
-1.27
0.09
26
Change in Tobin’s q surrounding the
Lehman Crises (control for CEO risk-taking)
Dependent variable:
Changes in ind-adj. Tobin's Q
Ind-adj CPS
Ind-adj Tobin's Q
E-index*10-1
Log total assets
Insider ownership
Insider ownership^2
ROA (EBIT/TA)
Capex/TA
Long-term debt/TA
R&D/Sales
=1 if R&D missing
Log company age*10-1
=1 if CEO is founder
Abnormal total compensation
Relative equity compensation*10-2
=1 if CEO ownership>=20%
CEO tenure (years)*10-2
Diversified
=1 if outside CEO*10-2
=1 if CEO is Chair
=1 if CEO is only director*10-1
Market beta
Co-movement with FIN industry
Inside debt-equity ratio
Delta*10-4
Vega*10-4
Ind-adj cash flow volatility*10-1
Coef.
0.38
-0.43
0.02
-0.03
-0.08
2.96
0.50
0.38
0.17
-1.80
-0.07
0.01
-0.08
-0.02
-0.28
-0.18
-0.24
0.05
-2.22
-0.06
0.09
-0.52
0.52
(1)
t-test
1.76
-11.22
0.14
-1.08
-0.07
1.01
1.18
0.82
1.05
-4.33
-1.21
0.03
-0.84
-0.53
-0.15
-0.75
-0.50
0.23
-0.36
-1.15
0.21
-2.21
1.94
-0.06
0.08
-1.48
0.52
*
***
***
**
*
Coef.
0.52
-0.48
0.03
-0.04
-1.58
12.42
0.86
0.49
0.34
-2.00
-0.05
0.15
0.25
-0.03
-1.59
-0.55
-0.45
0.06
-0.01
-0.08
-0.36
-0.48
0.43
(2)
t-test
2.14
-10.67
0.16
-1.28
-0.86
1.33
1.83
0.93
1.87
-4.76
-0.70
0.39
1.70
-0.71
-0.82
-1.16
-0.87
0.24
0.00
-1.49
-0.79
-1.88
1.46
-0.05
0.04
0.04
-1.22
0.27
1.22
**
***
*
*
***
*
*
Coef.
0.53
-0.48
0.01
-0.04
-1.64
12.82
0.91
0.52
0.33
-1.97
-0.04
0.09
0.25
-0.03
-1.31
-0.57
-0.46
0.05
-0.01
-0.08
-0.34
-0.47
0.42
0.10
-0.05
0.06
0.04
(3)
t-test
2.19
-10.69
0.09
-1.34
-0.89
1.37
1.93
0.99
1.81
-4.66
-0.66
0.24
1.73
-0.67
-0.67
-1.20
-0.89
0.20
0.00
-1.53
-0.75
-1.84
1.44
0.89
-1.19
0.36
1.27
**
***
*
*
***
*
*
27
Other selective variables:
Pre-crisis level and changes
Dependent var. (FY 2007):
EBIT/TA
Cash/TA
Coef. t-test
Coef. t-test
Div. Payout
Coef.
t-test
TD/TA
Coef. t-test
Panel A: Pre-crisis ROA, cash holdings, dividend payout, and leverage (%)
Ind-adj CPS
8.99 2.82
***
-7.47 -1.93 *
Change in
Change in
EBIT/TA (%)
Cash/TA (%)
Coef. t-test
Coef. t-test
Panel B: Changes in firm characteristics (FY 2009-2007)
Ind-adj CPS
-2.72 -0.67
-2.77 -0.76
Dependent variables:
-1.76
-0.12
-5.02
-0.68
Change in Div. Change in
Payout (%)
TD/TA (%)
Coef. t-test
Coef. t-test
10.09 0.45
11.92
1.72 *
28
Debt Financing by CEO Pay Slice (CPS)
% of firms accessing the debt market
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
-3
Bond-Low CPS
-2
-1
Bond-High CPS
1
Loan-Low CPS
2
3
Loan-High CPS
29
Bond analysis by CPS type
Firms raise funds before (or after) crisis Firms raise funds in both periods
Low CPS
High CPS
Low CPS
High CPS
Mean Median Mean
Median
Mean Median Mean Median
Panel A: Bond market
Pre-Lehman Crisis (from 16SEP2005 to15SEP2008)
Number of firms
19
21
Bond spread
225.83 177.47 211.36
Amount ($bn) during the 3 years
1.19
1.00
1.82 **
Maturity (month)
147.96 121.00 196.62
S&P credit rating
8.81
9.00
8.64
Post-Lehman Crisis ( from16SEP2008 to 15SEP2011)
Number of firms
32
35
Bond spread
403.51 404.74 324.09
Amount ($bn) during the 3 years
1.69
0.67
1.74
Maturity (month)
129.96 103.02 130.03
S&P credit rating
10.65
10.00
9.32
165.00
0.90
120.56
9.00
*
230.22
1.20 *
106.83
9.00 **
76
84
202.17 171.54 199.17
2.10
1.05
2.13
140.70 121.00 145.01
8.27
8.00
8.17
170.23
1.03
121.00
9.00
76
84
329.78 266.36 332.91
2.92
1.36
2.37
128.19 108.99 125.93
9.12
8.46
8.57
278.96
1.24
119.92
9.00
30
Loan analysis by CPS type
Firms raise funds before (or after) crisis Firms raise funds in both periods
Low CPS
High CPS
Low CPS
High CPS
Mean Median Mean
Median
Mean Median Mean Median
Panel B: Loan market
Pre-Lehman Crisis (from 16SEP2005 to15SEP2008)
Number of firms
57
77
All-in-spread
86.36
43.19 67.67
amount ($bn) during the 3 years
4.33
2.50
4.38
Maturity (month)
56.22
60.00 54.62
S&P credit rating
8.78
8.00
8.23
Post-Lehman Crisis ( from16SEP2008 to 15SEP2011)
Number of firms
5
6
All-in-spread
303.21 300.00 229.48
amount ($bn) during the 3 years
1.12
1.19
0.97
Maturity (month)
41.29
36.00 43.30
S&P credit rating
11.78
13.00
9.11 *
39.79
2.63
60.00
8.00
230.81
0.92
39.80
8.82 *
83
101.51
4.23
54.53
9.57
62.50
2.40
59.99
9.00
83
256.03 245.00
2.31
1.50
45.24 48.00
10.69 10.00
62
89.30
3.58
55.30
9.68
50.26
1.92
60.00
9.00
62
227.85 220.19
1.71
1.25
45.54 47.33
9.92
9.85
31
Changes in Credit Rating
All firms
Ind-adj CPS
Ind-adj Tobin's Q
E-index
Log total assets
Insider ownership (%)
Insider ownership^2
ROA (EBIT/TA; %)
Capex/TA(%)
Long-term debt/TA (%)
R&D/Sales (%)
=1 if R&D missing
Log company age
=1 if CEO is founder
Abnormal total compensation
Relative equity compensation
=1 if CEO ownership>=20%
CEO tenure (years)
Diversified
=1 if outside CEO
=1 if CEO is Chair
=1 if CEO is only director
Change in term spread
(10year-3m)
Change in credit spread
(BAA-AAA)
(1) OLS
(2)Multi-nominal logit model
Change in ratings Up grade
Down grade
Coef. t-test
Coef. z-test
Coef. z-test
**
-0.76 -0.84
5.20 2.16
-0.37 -0.19
0.22
1.42
-1.46 -2.95 *** -0.10 -0.28
-0.02 -0.26
0.17 0.96
0.09 0.75
***
-0.24 -2.66
-0.31 -1.21
-0.50 -2.69
0.01
0.33
-0.64 -2.61 *** -0.31 -1.88
0.00 -0.36
0.03 2.98 ***
0.02 2.58
***
-0.09 -5.48
0.03 0.60
-0.17 -4.25
0.01
0.76
-0.14 -2.15 **
-0.07 -1.53
**
0.00 -0.69
-0.04 -2.07
-0.04 -2.56
*
-0.03 -1.88
0.03 0.58
-0.06 -1.27
-0.01 -0.02
-0.19 -0.27
-0.26 -0.54
***
0.10
0.78
-1.09 -3.34
-0.18 -0.75
-0.30 -0.75
-0.46 -0.47
-0.96 -1.09
-0.37 -1.99 **
0.69 1.27
-0.81 -1.95
*
**
0.11
1.90
-0.38 -2.10
0.39 1.36
-0.26 -0.25
-62.97 -0.05
-57.93 -0.08
0.00 -0.16
0.04 0.83
0.00 0.08
0.34
0.43
-1.08 -0.70
-0.48 -0.33
**
-0.26 -1.00
1.40 2.26
-0.21 -0.38
0.24
1.17
-1.07 -1.93 *
0.29 0.69
-0.09 -0.50
-0.58 -1.09
-0.14 -0.40
0.32
1.50
-0.50 -0.80
0.77 1.66
-0.73
-0.91
1.14
0.55
-2.88
-1.75
***
*
***
***
**
*
*
*
32
Changes in Credit Rating
weighted by bond or loan issue amounts
Bond market
CPS variable:
Ind-adj CPS or CPS
Ind-adj Tobin's Q
E-index
Log total assets
Insider ownership (%)
Insider ownership^2
ROA (EBIT/TA; %)
Capex/TA (%)
Long-term debt/TA(%)
R&D/Sales (%)
=1 if R&D missing
Log company age
=1 if CEO is founder
Abnormal total compensation
Relative equity compensation
=1 if CEO ownership>=20%
CEO tenure (years)
Diversified
=1 if outside CEO
=1 if CEO is Chair
=1 if CEO is only director
Change in term spread
Change in credit spread
=1 if loan type=revolver
=1 if loan type=term loan
Ind-adj CPS
Coef.
t-test
-9.87
-3.07
-1.65
-3.22
0.26
1.31
0.04
0.13
-0.28
-1.33
0.01
0.80
0.03
0.43
-0.07
-1.14
-0.01
-0.26
-0.19
-2.43
0.46
0.61
0.84
2.10
0.04
0.03
0.69
0.83
0.07
0.23
2.43
0.60
0.11
1.77
0.83
0.35
1.02
1.21
0.33
0.47
-0.54
-0.95
-0.61
-1.85
-0.78
-1.64
***
***
**
**
*
*
CPS
Coef.
t-test
-9.51
-3.31
-1.74
-3.42
0.27
1.38
0.02
0.05
-0.31
-1.45
0.01
1.02
0.01
0.20
-0.06
-1.00
0.00
-0.14
-0.20
-2.53
0.50
0.67
0.85
2.14
-0.17
-0.13
0.68
0.83
0.10
0.34
2.99
0.74
0.10
1.60
1.21
0.52
0.99
1.18
0.31
0.45
-0.50
-0.88
-0.61
-1.86
-0.74
-1.55
Loan market
***
***
**
**
*
Ind-adj CPS
Coef.
t-test
-4.39
-1.12
0.15
0.24
-0.11
-0.46
-0.61
-1.50
-0.37
-1.49
0.01
1.03
-0.07
-0.84
0.12
1.64
-0.02
-0.78
0.01
0.08
0.15
0.15
0.16
0.34
-0.66
-0.42
0.86
1.24
-0.14
-0.55
-4.98
-1.06
0.09
1.29
-1.92
-0.80
-0.83
2.12
2.73
-0.74
0.97
-1.89
-1.02
-1.21
1.30
1.62
-1.50
1.53
CPS
Coef.
t-test
-6.34
-1.82
0.05
0.09
-0.13
-0.55
-0.67
-1.65
-0.40
-1.59
0.01
1.05
-0.06
-0.80
0.12
1.68
-0.02
-0.75
-0.03
-0.22
0.06
0.06
0.24
0.51
-0.31
-0.19
0.96
1.40
-0.21
-0.81
-4.66
-1.00
0.09
1.27
*
-1.92
-0.76
-0.75
2.04
2.65
-0.79
0.93
-1.90
-0.98
-1.11
1.25
1.58
-1.60
1.48
33
*
*
*
*
Conclusion

High CPS firms performed better than low
CPS firms during the Great Recession


Consistent with the CEO ability hypothesis


CDS spreads/ Tobin’s q / better public debt access / less
deterioration in credit rating
Higher paid CEOs can navigate through tough times
better than lower paid CEOs
CPS captures elements of both CEO ability
and the agency problem

The common managerial rent extraction proxies used in
the literature are also likely to capture managerial
ability.
34