CEO Compensation and Covenant Violations

46 Pages Posted: 17 Mar 2011 Last revised: 8 Mar 2020

See all articles by Bill B. Francis

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Xian Sun

Johns Hopkins University - Carey Business School

Date Written: March 7, 2020

Abstract

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

Francis, Bill B. and Hasan, Iftekhar and Sun, Xian, CEO Compensation and Covenant Violations (March 7, 2020). Available at SSRN: https://ssrn.com/abstract=1786590 or http://dx.doi.org/10.2139/ssrn.1786590

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Xian Sun (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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