How Does Managerial Entrenchment Affect Loan Covenant Violation?
35 Pages Posted: 28 Jan 2014
Date Written: January 8, 2012
Using a hand-collected sample of covenant violations reported by U.S. public firms, we examine whether and to what extent the entrenched board affects loan covenant violations. We find that CEO tenure is significantly and positively related to future covenant violation. Long tenure enhances CEO managerial entrenchment as it allows CEO to affect firm’s organization over the time. We also find that CEO cash compensation ratio is significantly and positively related to future covenant violation. As cash compensation provides less incentive to align the interest between CEO and shareholder, a higher cash compensation ratio is associated with a higher degree of managerial entrenchment. Overall, the findings suggest that managerial entrenchment is positively related to covenant violation. Nonetheless, we do not find evidence of two other managerial entrenchment proxies -- CEO duality and G index are significantly related to future covenant violations.
Keywords: Managerial entrenchment, covenant violation
JEL Classification: G21, G30
Suggested Citation: Suggested Citation