경영진-종업원의 임금격차가 신용등급과 타인자본비용에 미치는 영향

Using data of Korea listed firms’ CEO-to-employee pay gap in the business reports, we examine the effect of CEO-employee pay gap on the credit ratings and cost of debt. Existing literature has proposed two theoretical frameworks for executive pay disparity to affect the cost of debt financing (Lei 2017; Huang et al. 2018; Bardos et al. 2020; Chou et al. 2023). According to the managerial power view, a larger CEO-to-employee pay gap implies that the CEO is more powerful and entrenched. In contrast, the tournament theory have a different view on CEO-to-employee pay gap, and they believe that it reflects promotion-based tournament incentives for non-CEO top executives (or employees) to exert greater efforts. Therefore, managerial power view, which lead to the prediction that increased CEO-employee pay gap is associated with a higher probability of credit rating downgrades and resulting in a higher cost of debt. Conversely, tournament incentives view, which lead to the same prediction that increased CEO-employee pay disparity is associated with a higher probability of credit rating upgrades and resulting in a lower cost of debt. To test the two conflicting predictions, the main variable of interest in this paper is the CEO-employee pay gap, which is a ratio of the average total executives (or registered executives) pay subtract the average rank-and-file employees divided the average total executives (or registered executives) pay per person. For our empirical tests, we use the credit ratings and cost of debt. We obtain the credit ratings and cost of debt from the KISVALUE dataset. This study used 14,066 observations on KOSPI and KOSDAQ firms listed from 2013 to 2021. Our findings are as follows. First, we find that the CEO-employee pay gap is positively and significantly associated with the credit ratings and the CEO-employee pay gap is negatively and significantly associated with the cost of debt, which supports the tournament view. Second, we also find the positive association between the CEO-employee pay gap and credit ratings is reinforced by higher foreign ownership. However, when the cost of debt as the dependent variable that there is no significantly and positively affected. Finally, we also find the negative association between the CEO-employee pay gap and the cost of debt is attenuated by higher largest ownership. However, when the credit ratings as the dependent variable that there is no significantly and negatively affected. This study makes several contributions. First, our finding suggests that credit rating agencies and creditors tend to perceive a higher CEO-employee pay gap as low credit risk factor, thus the higher credit ratings and the lower cost of debt. This is, our result shows that the credit rating agencies and creditors perceive higher CEO-employee pay gap as a low risk factor to the firm, thus require the higher credit ratings and the lower cost of debt when they incorporate it into ratings and borrowing rate. Therefore, the study contributes to the research on the cost of debt and credit ratings. Second, our results also suggest that the stronger monitoring performed by high foreign ownership mitigates credit rating agencies’ concerns about the credit risk related to the executive pay gap. While, our result also shows that controlling shareholders’ ownership is increasing affects larger executive pay gap facilitates powerful CEOs to entrench themselves and expropriate outside creditors via risky projects, the self-interest maximizing behavior is referred to as “rent” extraction, resulting in higher monitoring costs and credits risks by creditors. These results implies that market responds differentially, thus we provide novel evidence on the pay gap-credit ratings relation or pay gap-cost of debt relation differ according to the ownership structure (i.e., foreign ownership vs. largest ownership). Third, our findings have policy and practical implications for regulators. In particular, our findings highlight the usefulness of the business reports’ disclosure requirements regarding CEO-employee pay gap by regulators. Our study extends both lines of research by investigating whether pay gap between CEOs and rank-and-file employees is relevant to credit risk assessments in the credit market. By doing so, our study also contributes to the debates about the usefulness of the proposed pay gap disclosure rule.