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How Do Ex-Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?

54 Pages Posted: 16 Mar 2011 Last revised: 27 Nov 2012

P. Raghavendra Rau

University of Cambridge

Jin Xu

Virginia Tech - Pamplin College of Business

Multiple version iconThere are 3 versions of this paper

Date Written: November 16, 2012

Abstract

We analyze a sample of over 3,600 ex ante explicit severance pay agreements in place at 808 firms and show that firms set ex ante explicit severance pay agreements as one component in managing the optimal level of equity incentives. Younger executives are more likely to receive explicit contracts and better terms. Firms with high distress risk, high takeover probability and high return volatility are significantly more likely to enter into new or revised severance contracts. Finally, ex post payouts to managers are largely determined by the ex ante contract terms.

Keywords: Managerial compensation, Severance pay, Optimal contracting

Suggested Citation

Rau, P. Raghavendra and Xu, Jin, How Do Ex-Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes? (November 16, 2012). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787777 or http://dx.doi.org/10.2139/ssrn.1787777

P. Raghavendra Rau (Contact Author)

University of Cambridge ( email )

Cambridge Judge Business School
Trumpington Street
Cambridge, Cambridgeshire CB21AG
United Kingdom
3103626793 (Phone)

HOME PAGE: http://www.raghurau.com/

Jin Xu

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://www.finance.pamplin.vt.edu/jin-xu/

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