Do CEO Compensation Policies Respond to Debt Contracting?
61 Pages Posted: 15 May 2017 Last revised: 20 Nov 2017
Date Written: November 18, 2017
This paper shows that CEO compensation policies respond to debt contracting. Using a regression discontinuity design around loan covenant violations, we find that compensation policies become more creditor-friendly following violations. For example, the vega of compensation and the use of stock options decrease, indicating lower risk-taking incentives. Firms also recontract on performance metrics that are more likely to be favored by creditors and reduce pay duration, especially when loan maturity is low. Overall, our results support 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