Industry tournament incentives and debt contracting

We test whether industry tournament incentives (ITI) for CEOs influence debt contracting. Measuring ITI as the pay gap between a CEO and the highest-paid industry peer, we find that firm credit ratings decrease and loan spreads and the tightness of non-price loan features increase with the industry pay gap. We find that a history of income increasing discretionary accruals and accounting restatements accentuate the influence of ITI on the cost of loans, while more restrictive loan contracts, greater alignment of managerial and creditor incentives, and higher default risk attenuate the influence of ITI on the cost of loans.