CEO Compensation and Covenant Violations
46 Pages Posted: 17 Mar 2011 Last revised: 8 Mar 2020
Date Written: March 7, 2020
This paper investigates the impact of managerial compensation on the likelihood of covenant violations and reports that higher CEO risk-shifting incentives significantly increase the likelihood of covenant violations. Evidence suggests that CEOs with creditor unfriendly compensation in leveraged firms are more likely to engage in risk-shifting behaviors. As opposed to constraining managers’ risk-shifting behaviors in the pre-violation stage, evidence reveals that strict covenants serve as a channel through which creditors gain control rights and exert direct influence at covenant violation.
Keywords: CEO Compensation, Covenant Violation, Creditor Rights, Corporate Governance
JEL Classification: J33, G30, G31, G32, G33, G34
Suggested Citation: Suggested Citation