Creditor Influence and CEO Compensation: Evidence from Debt Covenant Violations

• 成果类型: Article
• 署名作者: Balsam, Steven; Gu, Yuqi; Mao, Connie X.
• 署名单位: Pennsylvania Commonwealth System of Higher Education (PCSHE); Temple University; Western New England University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-52013
• 发表日期: 2018
• 页码: 23-50
• 关键词: capital structure; corporate governance; CASH COMPENSATION; lending relationships; earnings management; risk-taking; bank loans; executive-compensation; managerial incentives; restructuring charges

摘要

Debt covenant violation alters firm dynamics, providing creditors with the right to demand repayment, and via that right, influence firm actions. We provide evidence consistent with creditors employing that channel to influence CEO compensation. Using regression discontinuity analysis, we show that in the year after a covenant violation, after controlling for other factors, CEO compensation is 8.5 percent lower and the CEO's compensation package contains fewer risk-taking incentives, as the vega associated with newly granted options is 26 percent lower. These changes are more pronounced when the creditor has greater influence, such as when the borrower and creditor have a prior lending relationship, the creditor is a highly reputable bank, or when the borrower is financially weaker. We also find that CEOs' risk-taking incentives decrease with the number of debt covenants; in particular, the number of performance debt covenants being breached.