Say on Pay, CEO Pay Sensitivities, Firm Risk and Agency Costs of Debt

Abstract

I examine how Say on Pay affects firms’ agency costs of debt. Using a sample of US listed firms and employing a difference-in-differences framework, I find some evidence that higher CEO delta leads to a decrease in stock return volatilities and lower agency costs of debt, consistent with Brockman, Martin and Unlu (2010). Further, I find some evidence that this decrease in agency costs of debt is concentrated in firms with long CEO tenures and high institutional ownership, within firms that show greater responsiveness to Say on Pay, implying that Say on Pay improves corporate governance in poorly governed firms and strengthens shareholder power. My findings are consistent with Correa and Lel (2016) and Cai and Walking (2011) and suggest that Say on Pay is an effective substitute for a corporate governance mechanism.