Explicit employment contracts and CEO compensation

Wei-Ling Song and Kam-Ming Wan

Journal of Corporate Finance, 2017, vol. 44, issue C, 540-560

Abstract: This study investigates the relation between the use of explicit employment agreements (EA) and CEO compensation. Overall, our findings are broadly consistent with the predictions of Klein, Crawford, and Alchian (1978) that an EA is used to induce CEOs to make firm-specific human capital investments that are vulnerable to opportunistic behavior. We determine that compensation is higher when CEOs have employment agreements that are written, longer in duration, or more explicit in terms. Additionally, such employment agreements are more likely to occur when firms have (i) externally hired CEOs, (ii) CEOs with large abnormal compensation, (iii) low investment intensity, (iv) low growth opportunities, and (v) CEOs with a short employment history with the firm.

Keywords: Employment contracts; CEO compensation; Contract explicitness (search for similar items in EconPapers)
JEL-codes: G34 G38 J31 J33 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:44:y:2017:i:c:p:540-560

DOI: 10.1016/j.jcorpfin.2014.11.002

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