The Equity Mix in Executive Compensation: An Investigation of Cross-Country Differences

Stephen Bryan, Robert Nash, Ajay Patel


Why do firms from some countries use no equity in the compensation mix, while others use amounts equivalent to that observed in the U.S.? We examine this issue by investigating compensation data from 381 firms in 43 countries over the 1996 to 2000 period. The data indicate that firms use more equity-based compensation in countries with equity-oriented capital markets and where shareholder rights are strongly protected. After controlling for these country-level macro-factors, we test for how the firm-specific agency costs of debt and equity impact compensation structure. We find that firms with higher growth opportunities (and therefore higher agency costs of equity) and lower risk of default (and therefore lower agency costs of debt) use more equity in the compensation mix. This is consistent with the predictions of contracting theory.

Full Text:



Altman, E., 1993, Corporate Financial Distress and Bankruptcy, New York: Wiley and Sons.

Asquith, P., and T. Wizman, 1990, Event risk, covenants, and bondholder returns in leveraged buyouts, Journal of Financial Economics 19, 195-213.

Begley, J., and G. Feltham, 1999, An empirical examination of the relation between debt contracts and management incentives, Journal of Accounting and Economics 27, 229- 259.

Bizjak, J., J. Brickley, and J. Coles, 1993, Stock-based incentive compensation and investment behavior, Journal of Accounting and Economics 16, 349-372.

Black, F., and M. Scholes, 1973, The pricing of options and corporate liabilities, Journal of Political Economy 81, 637-654.

Booth, L., V. Aivazian, A. Demirguc-Kunt, and V. Maksimovic, 2001, Capital structure in developing countries, Journal of Finance 56, 87-130.

Brennan, M., and E. Schwartz, 1980, Analyzing convertible bonds, Journal of Financial and Quantitative Analysis 15, 907-929.

Bryan, S., R. Nash, and A. Patel, 2006, Can the agency costs of debt and equity explain the changes in executive compensation during the 1990s?, Journal of Corporate Finance 12, 516-535.

Bryan, S., L. Hwang, and S. Lilien, 2000, CEO stock-based compensation: An empirical analysis of incentive-intensity, relative mix, and economic determinants, Journal of Business 73, 661-693.

Comment, R., and G. Jarrell, 1995, Corporate focus and stock returns, Journal of Financial Economics 37, 67-87.

Cook, D., and J. Easterwood, 1994, Poison put bonds: An analysis of their economic role, Journal of Finance 49, 1905-1920.

Crabbe, L., 1991, Event risk: An analysis of losses to bondholders and super poison put bond covenants, Journal of Finance 46, 689-706.

Demirguc-Kunt, A., and V. Maksimovic, 1999, Institutions, financial markets, and firm debt maturity, Journal of Financial Economics 54, 295-336.

Dow, J., and G. Gorton, 1997, Stock market efficiency and economic efficiency: Is there a connection?, Journal of Finance 52, 1087-1129.

Easterbrook, F., 1984, Two agency-cost explanations of dividends, American Economic Review 74, 650-659.

Eaton, J., and H. Rosen, 1983, Agency, delayed compensation, and the structure of executive compensation, Journal of Finance 38, 1489-1505.

Gaver, J., and K. Gaver, 1993, Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies, Journal of Accounting and Economics 16, 125-160.

Holmstrom, B., and J. Tirole, 1993, Market liquidity and performance measurement, Journal of Political Economy 101, 678-709.

International Monetary Fund, various years, International Financial Statistics, Washington, DC: International Monetary Fund.

Jensen, M., and W. Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305-360.

John, T., and K. John, 1993, Top management compensation and capital structure, Journal of Finance 48, 949-974.

Kole, S., 1997, The complexity of compensation contracts, Journal of Financial Economics 43, 79-104.

La Porta, R., F. López-de-Silanes, A. Shleifer, and R. Vishny, 1998, Law and finance, Journal of Political Economy 106, 1113-1150.

La Porta, R., F. López-de-Silanes, A. Shleifer, and R. Vishny, 1997, Legal determinants of external finance, Journal of Finance 52, 1131-1150.

Lehn, K., and A. Poulsen, 1989, Free cash flow and stockholder gains in going private transactions, Journal of Finance 44, 771-787.

Lewellen, W., C. Loderer, and K. Martin, 1987, Executive compensation and executive incentive problems: An empirical evidence, Journal of Accounting and Economics 9, 287-310.

Malitz, I., 1994, The modern role of bond covenants, Working paper, Research Foundation of ICFMA.

Mayer, C., 1990, Financial systems, corporate finance, and economic development, in R. Hubbard, ed.: Asymmetric Information, Corporate Finance, and Investment, (University of Chicago Press, Chicago, Ill.).

Mehran, H., 1995, Executive compensation structure, ownership, and firm performance, Journal of Financial Economics 38, 163-184.

Morck, R., B. Yeung, and W. Yu, 2000, The information content of stock markets: Why do emerging markets have synchronous stock price movements?, Journal of Financial Economics 58, 215-260.

Murphy, K., 1985, Corporate performance and managerial remuneration: An empirical analysis, Journal of Accounting and Economics 7, 11-42.

Myers, S., 1977, Determinants of corporate borrowing, Journal of Financial Economics 5, 147-175.

Pagano, M., and A. Roell, 1998, The choice of stock ownership structure: Agency costs, monitoring and the decision to go public, Quarterly Journal of Economics 113, 187-225.

Rajan, R., and L. Zingales, 1998, Financial dependence and growth, American Economic Review 88, 559-586.

Rozeff, M., 1982, Growth, beta, and agency costs as determinants of dividend payout ratios, Journal of Financial Research 5, 249-259.

Smith, C., and R. Watts, 1992, The investment opportunity set and corporate financing, dividend, and compensation policies, Journal of Financial Economics 32, 263-292.

Stulz, R., 2000, Financial structure, corporate finance, and economic growth, International Review of Finance 1, 11-38.

Subrahmanyam, A., and S. Titman, 1999, The going public decision and the development of financial markets, Journal of Finance 54, 1045-1082.

Thurow, L., 1992, Head-to-head: The coming economic battle among Japan, Europe, and America, New York: Warner Books.

Yermack, D., 1995, Do corporations award CEO stock options effectively?, Journal of Financial Economics 39, 237-269.


  • There are currently no refbacks.

Copyright (c) 2022 Ajay Patel

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.