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Executive pay disparity and cost of debt financing

Hsin-I Chou (School of Economics, Finance and Marketing, RMIT University, Melbourne, Australia)
Xiaofei Pan (Sydney Business School, University of Wollongong, Fairy Meadow, Australia)
Jing Zhao (La Trobe Business School, Bundoora, Australia)

International Journal of Managerial Finance

ISSN: 1743-9132

Article publication date: 5 December 2022

Issue publication date: 24 October 2023




This paper aims to examine the relationship between executive pay disparity and the cost of debt.


The authors use a sample of syndicated bank loans granted to United States (US) listed firms from 1992 to 2014 and adopt the loan yield spread (Chief Executive Officer (CEO) pay slice) as the main proxy for the cost of debt (executive pay disparity). The authors also use the Heckman two-stage model to address the sample selection bias and the two-stage least squares and propensity score matching methods to control the potential endogeneity issues. To test different views about executive pay disparity, the authors adopt the cash-to-stock ratio to proxy for managerial risk-shifting incentives.


The authors find that the cost of debt is significantly higher for firms with larger executive pay disparity, which is robust to sample selection bias, endogeneity concerns, alternative measures and various controls. This positive relationship increases with the risk-shifting incentives of CEOs instead of other top executives, which supports the managerial power view, and is stronger for firms with higher levels of financial distress. The findings suggest that creditors view executive pay disparity are associated with higher credit risk and CEO entrenchment.


This paper reveals one “dark” side of executive pay disparity: it increases the cost of debt and identifies a significant role played by CEOs' risk-shifting incentives. The authors provide direct evidence of the relevance of pay differential to corporate credit analysis.



The authors are grateful to Linda Chen, IM Premachandra, David Sun and other seminar participants at the University of Otago, University of Wollongong and RMIT University, and conference participants at the 25th Conference on the Theories and Practices of Securities and Financial Markets and the European Financial Management Association 2018 annual meeting for their highly valuable comments.


Chou, H.-I., Pan, X. and Zhao, J. (2023), "Executive pay disparity and cost of debt financing", International Journal of Managerial Finance, Vol. 19 No. 5, pp. 1076-1097.



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