Are Ex-Ante CEO Severance Pay Contracts Consistent with Efficient Contracting?

52 Pages Posted: 28 Feb 2011 Last revised: 5 Aug 2016

See all articles by Brian D. Cadman

Brian D. Cadman

University of Utah - David Eccles School of Business

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Sandy Klasa

University of Arizona - Department of Finance

Date Written: November 15, 2011

Abstract

Efficient contracting predicts that ex-ante severance pay contracts are offered to CEOs as protection against downside risk and to encourage investment in risky positive net-present-value projects. Consistent with this prediction, we find that ex-ante contracted severance pay is positively associated with proxies for a CEO’s risk of dismissal and costs the CEO would incur from dismissal. Additionally, we show that the contracted severance payment amount positively impacts CEO risk-taking and the extent to which a CEO invests in projects that have a positive net-present-value. Overall, our findings imply that ex-ante severance pay contracts are consistent with efficient contracting.

Keywords: CEO Turnover, CEO Compensation, Efficient Contracting

JEL Classification: G31, G32, G34

Suggested Citation

Cadman, Brian D. and Campbell, John L. and Klasa, Sandy, Are Ex-Ante CEO Severance Pay Contracts Consistent with Efficient Contracting? (November 15, 2011). Journal of Financial and Quantitative Analysis (JFQA), Vol. 51, No. 3, 2016, Available at SSRN: https://ssrn.com/abstract=1773070 or http://dx.doi.org/10.2139/ssrn.1773070

Brian D. Cadman

University of Utah - David Eccles School of Business ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States
801-585-9517 (Phone)

HOME PAGE: http://www.business.utah.edu/bio/briancadman

John L. Campbell

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
852
Abstract Views
5,087
Rank
52,517
PlumX Metrics