Do CEO Compensation Policies Respond to Debt Contracting?
76 Pages Posted: 15 May 2017 Last revised: 22 Dec 2017
Date Written: December 17, 2017
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: Suggested Citation