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Are Ex-Ante CEO Severance Pay Contracts Consistent with Efficient Contracting?Brian D. CadmanUniversity of Utah - David Eccles School of Business John L. CampbellUniversity of Georgia - J.M. Tull School of Accounting Sandy KlasaUniversity of Arizona - Department of Finance 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.
Number of Pages in PDF File: 50 Keywords: CEO Turnover, CEO Compensation, Efficient Contracting JEL Classification: G31, G32, G34 working papers seriesDate posted: February 28, 2011 ; Last revised: November 15, 2011Suggested CitationContact Information
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