CEO Short-Term Incentives and the Agency Cost of Debt

75 Pages Posted: 15 May 2017 Last revised: 11 Oct 2024

See all articles by Brian Akins

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

Jonathan Bitting

Appalachian State University - Walker College of Business

David De Angelis

University of Houston - C.T. Bauer College of Business

Maclean Gaulin

University of Utah - David Eccles School of Business

Date Written: August 27, 2024

Abstract

This paper shows that creditors’ horizon interests impact the design of CEO compensation contracts. Using a regression discontinuity design, we find that borrowing firms provide shorter incentives to their CEO following a loan covenant violation. They do so by decreasing the horizon of pay and tilting the choice of performance metrics toward accounting goals, in particular short-term ones. This effect is stronger when creditors’ interests are more immediate, such as among loans with short remaining maturity and when borrowers have lower cash reserves. This effect is weaker when the cost to shareholders is higher, such as among firms with high growth opportunities. Together these results are consistent with boards intending to facilitate renegotiation and mitigate repayment risk while balancing shareholder interests. Overall, our evidence supports a novel reason for the use of short-term incentives, namely to reduce the agency-cost of debt.

Keywords: CEO Compensation, Creditors' Interests, Short-Term Incentives

JEL Classification: G32, G34, J33

Suggested Citation

Akins, Brian K. and Bitting, Jonathan and De Angelis, David and Gaulin, Maclean, CEO Short-Term Incentives and the Agency Cost of Debt (August 27, 2024). Available at SSRN: https://ssrn.com/abstract=2967326 or http://dx.doi.org/10.2139/ssrn.2967326

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

Jonathan Bitting (Contact Author)

Appalachian State University - Walker College of Business ( email )

Boone, NC 28608
United States

David De Angelis

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

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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