CEO Contractual Protection and Debt Contracting

• In Event: Debt contracting and financial reporting

Abstract

CEO employment agreements and severance pay agreements are prevalent among S&P1500 firms. While prior research has examined their impact on corporate decisions 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, 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. Additional analyses based on switch firms and public bond yield spread lead to the same inferences. Collectively these results shed light on the impact of CEO contractual protection on debt contracting.

Authors

• Qiang Cheng, Singapore Management University

• Xia Chen, Singapore Management University

• Alvis K. Lo, Boston College

• Xin Wang, University of Hong Kong