How Does Managerial Entrenchment Affect Loan Covenant Violation?

35 Pages Posted: 28 Jan 2014

Date Written: January 8, 2012

Abstract

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

Jiang, Liangliang, How Does Managerial Entrenchment Affect Loan Covenant Violation? (January 8, 2012). Available at SSRN: https://ssrn.com/abstract=2386517 or http://dx.doi.org/10.2139/ssrn.2386517

Liangliang Jiang (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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