Debt Contracting on Management

69 Pages Posted: 2 Apr 2016 Last revised: 23 Sep 2018

See all articles by Brian Akins

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

Date Written: August 30, 2018

Abstract

Change of management restrictions (CMRs) in loan contracts give lenders explicit ex-ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower to retain talent.

Keywords: Debt Contracting, Human Capital, CEO Turnover

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

Suggested Citation

Akins, Brian K. and De Angelis, David and Gaulin, Maclean, Debt Contracting on Management (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=2757508 or http://dx.doi.org/10.2139/ssrn.2757508

Brian K. 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 ( 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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