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Do CEO Compensation Policies Respond to Debt Contracting?

61 Pages Posted: 15 May 2017 Last revised: 20 Nov 2017

Brian Akins

Rice University - Jesse H. Jones Graduate School of Business

Jonathan Bitting

Rice University, Jesse H. Jones Graduate School of Business, Students

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business

Maclean Gaulin

University of Utah - David Eccles School of Business - Department of Accounting

Date Written: November 18, 2017

Abstract

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

Akins, Brian and Bitting, Jonathan and De Angelis, David and Gaulin, Maclean, Do CEO Compensation Policies Respond to Debt Contracting? (November 18, 2017). Available at SSRN: https://ssrn.com/abstract=2967326 or http://dx.doi.org/10.2139/ssrn.2967326

Brian 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)

Rice University, Jesse H. Jones Graduate School of Business, Students ( email )

Houston, TX
United States

David De Angelis

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://www.de-angelis.com

Maclean Gaulin

University of Utah - David Eccles School of Business - Department of Accounting ( 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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