CEO Equity Holdings, Compensation And Financial Leverage

The authors analyze the relationship of financial leverage with CEO compensation and equity holdings. As expected, the proportion of firm stock held by managers is negatively correlated with leverage. There is a complex relationship between option holdings and debt. When the delta of the manager's option portfolio is high the relationship is negative, but as the delta decreases the correlation weakens. The design of compensation also has an interesting relationship with leverage. When the manager is paid more salary, leverage is higher. But, the relationship can turn negative if a greater portion of compensation is paid as bonuses or equity grants.