Executive bonus compensation and financial leverage: do growth and executive ownership matter?
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Abstract
Purpose: This study examines the impact of executive bonus compensation on a firm’s financial leverage policy and the extent to which this compensation–leverage relation is moderated by firm growth and executive ownership.
Design/method/approach: Using data from 213 non-financial and non-utility UK FTSE 350 firms for the period 2007-2015, generating a total of 1,784 firm-year observations, panel econometric methods are employed to test our model.
Findings: Drawing insights from agency theoretic view, we uncover that managerial cash bonus compensation is negatively and significantly related to financial leverage. However, stock bonus compensation has a positive and significant impact on leverage. We also observe that compensation–leverage is moderated by both firm growth and executive ownership. Our results remain robust to alternative econometric models.
Originality/value: While this paper builds on the risk-motivated argument of executive bonus compensation literature, it is the first – to the best of our knowledge – to explore the bonus compensation-corporate financial leverage and, particularly, examine the extent to which firm growth and corporate executive ownership matter in this relationship.