Explicit vs. Implicit Contracts: Evidence from CEO Employment Agreements
40 Pages Posted: 3 Jun 2005 Last revised: 26 Jul 2008
Date Written: July 4, 2008
We report evidence on the determinants of whether the relationship between a firm and its Chief Executive Officer (CEO) is governed by an explicit (written) or an implicit agreement. We find that fewer than half of the CEOs of S&P 500 firms have comprehensive explicit employment agreements. Consistent with contracting theory, explicit agreements are more likely to be observed, and are likely to have a longer duration, where the sustainability of the relationship is less certain and where the expected loss to the CEO is greater if the firm fails to honor the agreement.
Keywords: Contracting, CEOs, corporate governance
JEL Classification: G30, G34
Suggested Citation: Suggested Citation