CEO employment agreements and severance pay agreements are prevalent among S&P1500 firms. While prior research has examined their impact on corporate decision from shareholders’ perspective, there is little research on their impact from debtholders’ perspective. We examine the effect on debt contracting of CEO contractual protection, in the form of employment agreements and severance pay agreements. We find that compared with other loans, loans issued by firms with CEO contractual protection contain more financial covenants, particularly performance covenants, are more likely to have performance pricing provisions, and have higher loan spreads. We further find that this effect increases with the monetary strength of CEO contractual protection and CEOs’ appetite and opportunities for risk-taking. Collectively these results shed light on the impact of CEO contractual protection on debt contracting.
employment agreement, severance pay agreement, debt contracting
Accounting | Corporate Finance
Corporate Governance, Auditing and Risk Management
Asian Bureau of Finance and Economic Research Annual Conference 5th ABFER 2017, May 22; Tsinghua-Chinese University of Hong Kong Conference 2016, June
City or Country
CHEN, Xia; CHENG, Qiang; LO, Alvis; and WANG, Xin.
CEO contractual protection and debt contracting. (2017). Asian Bureau of Finance and Economic Research Annual Conference 5th ABFER 2017, May 22; Tsinghua-Chinese University of Hong Kong Conference 2016, June. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1625
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