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Do CEO Compensation Policies Respond to Debt Contracting?

76 Pages Posted: 15 May 2017 Last revised: 22 Dec 2017

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

Jonathan Bitting

Rice University, Jesse H. Jones Graduate School of Business, Students

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Maclean Gaulin

University of Utah - David Eccles School of Business

Date Written: December 17, 2017

Abstract

This paper shows that CEO compensation policies become more creditor-friendly when creditors' bargaining power increases, revealing a channel through which creditors indirectly influence corporate governance. Using a regression discontinuity design, we find that following loan covenant violations, firms provide fewer stock-options, reduce pay duration—especially when loan maturity is low, and contract on accounting-based goals when creditors do as well. By reducing risk-taking incentives and aligning pay duration and the choice of performance metrics with creditors' interests, CEO compensation policies appear to serve as commitment devices to decrease the agency cost of debt.

Keywords: CEO Compensation, Creditor Control Rights, Debt Contracting

JEL Classification: G32, G34, J33

Suggested Citation

Akins, Brian and Bitting, Jonathan and De Angelis, David and Gaulin, Maclean, Do CEO Compensation Policies Respond to Debt Contracting? (December 17, 2017). Available at SSRN: https://ssrn.com/abstract=2967326 or http://dx.doi.org/10.2139/ssrn.2967326

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

Jonathan Bitting (Contact Author)

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

Houston, TX
United States

David De Angelis

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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