Credit rating, CEO compensation and corporate investment

Xiao, Di (2019). Credit rating, CEO compensation and corporate investment. University of Birmingham. Ph.D.

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Abstract

Information asymmetry is the main cause of investment deviating from the optimal level. Given that the existence of credit rating can mitigate information asymmetry and play a monitoring role in managerial investment decisions, we use a large sample of US listed firms over the period from 1997 to 2014 and find that there is a significantly positive relationship between the existence of credit rating and investment efficiency by using the panel regression models. Moreover, we find that the positive relationship between existence of credit rating and investment efficiency is less pronounced in firms with a more transparent information environment. Since CEO inside debt holdings can align the interests of CEOs with those of debtholders, CEOs with high inside debt holdings tend to conduct more conservative policies. By using M&A deals announced over the period between 2007 and 2015 in the US market and employing cross-sectional regression models, we find there is a significant negative relationship between CEO inside debt holdings and takeover premiums. Moreover, we find this negative relationship is confined to cash-dominated deals, rated bidders or rated targets. We collect M&A deals announced over the period from 2000 to 2015 from Thomson One Banker and employ a tobit model to examine the relationship between CEO power and payment method in M&A. Given that powerful CEOs motivated by entrenchment and an increase in compensations following M&As tend to pursue more M&As, we find powerful CEOs are more likely to finance with cash in order to make the deal successful. We further find that the positive relationship between CEO power and cash payment is less pronounced when the bidder has higher credit rating or higher institutional holdings.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):