The Salience of Creditors' Interests and CEO Compensation
79 Pages Posted: 15 May 2017 Last revised: 12 Jul 2018
Date Written: June 27, 2018
This paper shows that firms adjust CEO compensation policies when creditors' interests are salient. This effect helps explain controversial compensation practices such as weak performance incentives and short pay duration. Our findings also show that to mitigate the agency cost of debt, compensation contracts can reflect not only the firm's capital structure but the debt contract itself. For example, firms tend to contract on accounting-based goals when creditors do as well. We reach these conclusions both by studying a broad sample of firms seeking debt financing and by using a regression discontinuity design around loan covenant violations.
Keywords: CEO Compensation, Creditors' Interests, Debt Contracting
JEL Classification: G32, G34, J33
Suggested Citation: Suggested Citation