Are Ex-Ante CEO Severance Pay Contracts Consistent with Efficient Contracting?
Brian D. Cadman
University of Utah - David Eccles School of Business
John L. Campbell
University of Georgia - J.M. Tull School of Accounting
University of Arizona - Department of Finance
November 15, 2011
Journal of Financial and Quantitative Analysis (JFQA), Vol. 51, No. 3, 2016
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: 52
Keywords: CEO Turnover, CEO Compensation, Efficient Contracting
JEL Classification: G31, G32, G34
Date posted: February 28, 2011 ; Last revised: August 5, 2016