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The relation between earnings-based measures in firm debt contracts and CEO pay sensitivity to earnings

Adrienne Rhodes

Journal of Accounting and Economics, 2016, vol. 61, issue 1, 1-22

Abstract: I investigate how implicit incentives provided by earnings-based debt covenants affect the structure of CEO compensation contracts. This provides a new and unique view of how the CEO׳s incentives are shaped by not only his compensation contract but also debt contracts. I find when debt contracts contain an earnings-based covenant, the CEO׳s pay sensitivity to earnings is muted. Additionally, I find some evidence that pay sensitivity to earnings varies with earnings-based covenant slack. This study provides evidence consistent with shareholders rebalancing the CEO׳s earnings incentives in the presence of earnings-based covenants, thereby tilting incentives away from earnings performance.

Keywords: Executive compensation; Debt contracts; Covenants; Agency costs (search for similar items in EconPapers)
Date: 2016
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Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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Handle: RePEc:eee:jaecon:v:61:y:2016:i:1:p:1-22