Management equity incentives and bond credit spread: Evidence from China

Abstract

This study examines the relationship between management equity incentives and bond spreads using data from China's A-share listed companies from 2010 to 2023. While equity incentive plans can mitigate agency problems and promote effective investment decisions, they may also encourage risk-taking behaviors such as risk transfer, asset substitution, and shareholder-management collusion. These actions could intensify the infringement on bondholder interests, leading to higher bond credit spreads. Despite these conflicting effects, the study finds a strong positive correlation between management equity incentives and bond spreads in the Chinese market. The impact of equity incentives on bond credit spreads is particularly notable in firms with higher management salaries and concentrated shareholder ownership. Improving information transparency reduce the influence of equity incentives on bond credit spreads.