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| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Human Capital, Capital Structure, and CEO Remmuneration: An Empirical Analysis |
| Organization Unit | |
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| Language |
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| Institution | University of Zurich |
| Faculty | Faculty of Economics, Business Administration and Information Technology |
| Number of Pages | 92 |
| Date | 2015 |
| Abstract Text | Since Modigliani and Miller (1958) rst pointed to the irrelevance of capital structure in perfect markets, nancial economists are questioning which real world deviations from the standard asssumptions may lead to the relevance of capital structure. The trade-o theory mentions two reasons for the relevance of capital structure, namely the tax shield and nancial distress costs. Despite the signi cant tax advantages of high leverage, many companies decide in favor of modest leverage ratios. These modest ratios cannot be explained solely by nancial distress or even bankruptcy costs. While direct bankruptcy costs appear to be too low to explain the observed modest debt levels, indirect bankruptcy costs seem to prevent rms from taking on more leverage. Human capital costs are one example for indirect bankruptcy costs. As leverage increases, bankruptcy risk increases, which simultaneously leads to higher job loss risk. Hence, employees (and especially chief executive ocers who are in the center of this thesis) demand a compensation for this human capital risk in the form of higher pay. In this thesis the predictions of Titman (1984), and Berk, Stanton, and Zechner (2010) are tested by examining the e ect of leverage on chief executive ocer (CEO) compensation. Chemmanur, Cheng, and Zhang (2013) do also empirically test these predictions. While their analysis covers the years 1992 to 2006, the analysis in this thesis is extended until 2013. Moreover, contrary to existing research which focuses on the impact of leverage on CEO pay, this thesis adds to literature by also considering the relevance of CEO skills. It is suggested that the impact of leverage on CEO pay is stronger for CEOs with speci c skills. As speci c skills are valuable for one particular rm, CEOs with speci c skills face less outside options and thus, are more exposed to human capital risk. Finally, subjective compensation values are calculated to examine whether the suggested positive relation between leverage and CEO pay may only be driven by risk premiums required for the composition of wages. Risk averse employees (and especially CEOs) demand a risk premium to take on risky compensation elements. |
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