Do CEO stock options impact firm borrowing?

Are publicly-traded healthcare firms less likely to take on debt when their CEOs receive compensation through stock options?

That is the question asked by a British economist who studied the practice at U.S. companies. The effect occurred in more than 400 U.S. firms based on their operations between 1992 and 1997, Onur Tosun of the University of Warwick in the United Kingdom told the publication Consultant News.

"My research suggests that a firm is more likely to decrease leverage--the amount of debt used to finance a firm's assets--as its CEO is compensated more and more through options and as those options become a higher percentage of the firm's future cash flows," Tosun said. 

When the interests of shareholders and the C-suite begin to diverge, lenders tend to ask for higher interest rates in response, making some CEOs reluctant to add to their debt load, according to Tosun.

Whether Tosun's theory has a direct impact on hospitals or other healthcare providers is unclear. Many of the nation's largest publicly-traded healthcare entities did not reach a large scale until about the year 2000, with many significant mergers taking place in the mid-1990s or later. Tenet Healthcare, which was known as National Medical Enterprises until 1996, had taken on a significant amount of debt in the last decade, and made major moves about four years ago to refinance it.

However, Tosun noted that boards of directors could use his 2012 study as a springboard to make more efficient decisions when setting compensation practices for their top executives. Despite its significant debt, Tenet CEO Trevor Fetter was paid $22.7 million last year, and other studies suggest that healthcare CEO compensation of late has not been closely tied to performance.

To learn more:
- read the Consultant News article

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