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Debt Contracting on Management

74 Pages Posted: 2 Apr 2016 Last revised: 23 Jun 2017

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Maclean Gaulin

University of Utah - David Eccles School of Business - Department of Accounting

Date Written: June 21, 2017

Abstract

Contract theory has stressed the importance of human capital risk associated with management in debt contract design. Using a unique database of private loan contract terms, we find that when this risk is large, lenders include change of management restrictions (CMRs) in loan contracts. These restrictions give lenders explicit control over managerial retention and/or selection decisions. Our analysis also shows that lenders’ interplay with equity holders and the way equity holders (can) contract with management affects lenders’ decision to include a CMR. These results provide two implications that inform the theory: (i) human capital risk associated with management affects debt contracting, but the contracting space is broader than anticipated in existing models, and (ii) shareholders’ role in mitigating or exacerbating human capital risk faced by lenders is important in debt contract design. Finally, we find that the likelihood of CEO turnover more than halved during CMR terms suggesting that these clauses are respected by borrowers and that lenders can influence managerial turnover, even outside of default states.

Keywords: Debt Contracting, Human Capital, Executive Turnover

JEL Classification: D82, G20, G32, G34, J24

Suggested Citation

Akins, Brian and De Angelis, David and Gaulin, Maclean, Debt Contracting on Management (June 21, 2017). Available at SSRN: https://ssrn.com/abstract=2757508 or http://dx.doi.org/10.2139/ssrn.2757508

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

David De Angelis (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

Maclean Gaulin

University of Utah - David Eccles School of Business - Department of Accounting ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
801.585.0324 (Phone)

HOME PAGE: http://mgaulin.com

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