Initial Compensation Contracts for New Executives and Financial Distress Risk: An Empirical Investigation of UK Firms

63 Pages Posted: 20 Mar 2015 Last revised: 10 Nov 2017

See all articles by Jie Chen

Jie Chen

Leeds University Business School, University of Leeds

Amedeo De Cesari

University of Manchester - Alliance Manchester Business School - Finance & Accounting Group

Paula Hill

University of Bristol

Neslihan Ozkan

University of Bristol - School of Economics, Finance and Management, UK

Date Written: October 30, 2017

Abstract

This paper analyses the effect of financial distress risk on the initial compensation contracts of new executives in the UK, where credit markets are more concentrated than in the US. We find that financial distress risk has a negative and statistically significant impact on the level of cash-based compensation and total compensation of executives, who are newly hired from either outside or inside the firm. This negative impact is accentuated in firms with a high fraction of bank debt, suggesting that banks, as creditors, provide monitoring and influence initial executive compensation packages in firms with high financial distress risk. Additionally, we find that financial distress risk has a negative and significant impact on the fraction of equity-based compensation for both externally and internally appointed executives.

Keywords: Executive compensation; financial distress risk; bank monitoring

JEL Classification: G3

Suggested Citation

Chen, Jie and De Cesari, Amedeo and Hill, Paula and Ozkan, Neslihan, Initial Compensation Contracts for New Executives and Financial Distress Risk: An Empirical Investigation of UK Firms (October 30, 2017). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2580561 or http://dx.doi.org/10.2139/ssrn.2580561

Jie Chen

Leeds University Business School, University of Leeds ( email )

Leeds LS2 9JT
United Kingdom

HOME PAGE: http://https://business.leeds.ac.uk/about-us/our-people/staff-directory/profile/jie-chen-1/

Amedeo De Cesari

University of Manchester - Alliance Manchester Business School - Finance & Accounting Group ( email )

Crawford House
Booth Street East
Manchester, M15 6PB
United Kingdom
+44 (0) 161 2754298 (Phone)

Paula Hill

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

Neslihan Ozkan (Contact Author)

University of Bristol - School of Economics, Finance and Management, UK ( email )

United States

HOME PAGE: http://www.bristol.ac.uk/accounting/staff/ozkan.html

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