Is CEO pay disparity relevant to seasoned bondholders?

We demonstrate the existence of a positive relationship between CEO pay disparity and the yield spreads of seasoned corporate bonds, based on a panel data in the U.S. from 2001 to 2012. The evidence is robust against alternative measures of pay disparity, the inclusion of other determinants of yield spreads as well as industry and year effects, and the potential endogeneity problem. More supporting results from subsamples are presented, including those in the periods of pre- and post-subprime crisis, with varying degrees of agency problems related to free cash flow, with dissimilar default risk, and with different maturities. We further demonstrate that CEO pay disparity does not merely reflect, but rather goes beyond many factors of corporate governance in helping bondholders assess the risks they face. All together, these results convincingly show that pay disparity matters to bondholders.