Business Commons^™

Ceo Contractual Protection And Debt Contracting, Qiang Cheng, Xia Chen, Alvis K. Lo, Xin Wang

Research Collection School Of Accountancy

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 …