Download this Paper Open PDF in Browser

Do CEO Compensation Policies Respond to Debt Contracting?

61 Pages Posted: 15 May 2017 Last revised: 20 Aug 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: August 18, 2017

Abstract

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

Akins, Brian and Bitting, Jonathan and De Angelis, David and Gaulin, Maclean, Do CEO Compensation Policies Respond to Debt Contracting? (August 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

Paper statistics

Downloads
120
Rank
199,994
Abstract Views
303