Ducks and Economics

Alex Edmans at Wharton was brave enough to publish this:

The vast majority of theoretical research on executive compensation has focused on justifying compensating CEOs with equity-like instruments alone, such as stock and options. This emphasis has been likely been driven by the long-standing belief that, empirically, executives don’t hold debt. However, this belief arose not because CEOs actually don’t hold debt, but because disclosure of debt compensation was extremely limited and so researchers missed this component of compensation. Indeed, recent empirical studies (e.g. Bebchuk and Jackson 2005, Sundaram and Yermack 2007, and Gerakos 2007) found that CEOs do in fact hold substantial amounts of debt in their own firm (known as “inside debt”), in the form of defined benefit pensions and deferred compensation. In some cases, CEOs hold even more debt than equity. While the above papers had to hand-collect data on debt compensation, given limited disclosure, the Security and Exchanges Commission recently mandated disclosure of debt compensation starting from March 2007, which has allowed more systematic studies (e.g. Wei and Yermack 2010)