Do CEO Compensation Policies Respond to Debt Contracting?
61 Pages Posted: 15 May 2017 Last revised: 20 Aug 2017
Date Written: August 18, 2017
This paper shows that CEO compensation policies respond to debt contracting. We develop a novel measure of creditor-shareholder disagreement based on the performance metrics used in loan versus compensation contracts. Using a regression discontinuity design around loan covenant violations, we find that violations cause firms to switch toward the class of metrics used by creditors. Additionally, violating firms provide less risk-taking incentives and impose more difficult performance targets. Overall, our results are consistent with compensation contracts serving as commitment devices to decrease the agency cost of debt. They also reveal a channel through which creditors influence corporate governance.
Keywords: CEO Compensation, Creditor Control Rights, Debt Contracting
JEL Classification: G32, G34, J33
Suggested Citation: Suggested Citation