The Salience of Creditors' Interests and CEO Compensation
79 Pages Posted: 15 May 2017 Last revised: 26 Sep 2018
Date Written: September 19, 2018
This paper shows that firms adjust CEO compensation policies when creditors' interests are more 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 by using both a regression discontinuity design around loan covenant violations and studying a broad sample of financially constrained firms seeking debt financing.
Keywords: CEO Compensation, Creditors' Interests, Debt Contracting
JEL Classification: G32, G34, J33
Suggested Citation: Suggested Citation