Explicit vs. Implicit Contracts: Evidence from CEO Employment Agreements

40 Pages Posted: 3 Jun 2005 Last revised: 26 Jul 2008

Stuart Gillan

University of Georgia - Department of Finance

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Robert Parrino

University of Texas at Austin - Department of Finance

Date Written: July 4, 2008

Abstract

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

Gillan, Stuart and Hartzell, Jay C. and Parrino, Robert, Explicit vs. Implicit Contracts: Evidence from CEO Employment Agreements (July 4, 2008). AFA 2006 Boston Meetings . Available at SSRN: https://ssrn.com/abstract=687152 or http://dx.doi.org/10.2139/ssrn.687152

Stuart L. Gillan

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Jay C. Hartzell

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Robert Parrino (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5788 (Phone)
512-471-5073 (Fax)

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