Working paper
The Relationship between the Use of Accounting Measures in Debt and Incentive Contracts
SSRN
09/14/2012
DOI: 10.2139/ssrn.2146212
Abstract
The likelihood that tripping a debt covenant would precipitate the dismissal of top management provides an implicit incentive for managers to perform that is incremental to the explicit incentives in compensation contracts. I assess the sensitivity of the CEO's cash compensation to earnings and earnings-based covenants in the firm's debt contracts. When the debt contract contains an earnings-based covenant, the sensitivity of the CEO's pay to earnings is muted. This reflects the influence of earning-based debt contract terms on the CEO's incentives to focus on earnings. Additionally, I predict and find that the annual rebalancing the CEO's incentives in the compensation contract varies with the intensity of the firm's pre-existing earnings-based debt covenants. For all firms, on average a one-percentage point increase in ROA increases the CEO's cash compensation by 3.6 percent. In contrast, in firms with earnings-based covenants, a one-percentage point increase in ROA is associated with an increase in cash compensation of only 1.9 percent
Details
- Title: Subtitle
- The Relationship between the Use of Accounting Measures in Debt and Incentive Contracts
- Creators
- Adrienne Rhodes - University of Iowa
- Resource Type
- Working paper
- Publisher
- SSRN
- DOI
- 10.2139/ssrn.2146212
- Number of pages
- 46 pages
- Language
- English
- Date posted
- 09/14/2012
- Date updated
- 11/15/2012
- Academic Unit
- Accounting
- Record Identifier
- 9984380735502771
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