Debt Contracting on Management
BRIAN AKINS
Search for more papers by this authorCorresponding Author
DAVID DE ANGELIS
Correspondence: David De Angelis, Jones Graduate School of Business, Rice University, 6100 Main Street, MS 531 Houston, TX 77005; e-mail: deangelis@rice.edu
Search for more papers by this authorMACLEAN GAULIN
Brian Akins is at Rice University. David De Angelis is at Rice University. Maclean Gaulin is at the University of Utah. We thank Amit Seru (the Editor); an anonymous associate editor; two anonymous referees; Kerry Back; Anne Beatty; Jonathan Bitting; Alex Butler; Alan Crane; Kevin Crotty; Peter Demerjian; Dave Denis (discussant); Dick Dietrich; Jefferson Duarte; Aytekin Ertan; Janet Gao; Yaniv Grinstein; Gustavo Grullon; Matthew Gustafson (discussant); Yael Hochberg; Victoria Ivashina; Sébastien Michenaud; Yihui Pan (discussant); Andrea Pawliczek (discussant); Mitchell Petersen; Paul Povel; K. Ramesh; Michael Roberts; Daniel Saavedra; Doug Skinner; Ioannis Spyridopoulos; Joe Weber; James Weston; Regina Wittenberg-Moerman; Tzachi Zack; Feng Zhang (discussant); and seminar participants at London Business School, The Ohio State University, Rice University, University of Houston, the 2016 Academic Conference on Corporate Governance at Drexel University, the 2016 Annual Meeting of the Financial Management Association, the 2016 Annual Meeting of the Northern Finance Association, the 2016 Colorado Summer Accounting Research Conference, the 2016 Lone Star Accounting Conference, and the 2017 SFS Cavalcade North America Conference for helpful comments. We also thank Ryan Israelsen, Amir Sufi, and Ekaterina Volkova for sharing their data. We are grateful for the excellent research assistance provided by Wendy Chong, Asiya Kazi, Richie Ledo, Sophia Shao, and Richard Swartz. All remaining errors are our own. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorBRIAN AKINS
Search for more papers by this authorCorresponding Author
DAVID DE ANGELIS
Correspondence: David De Angelis, Jones Graduate School of Business, Rice University, 6100 Main Street, MS 531 Houston, TX 77005; e-mail: deangelis@rice.edu
Search for more papers by this authorMACLEAN GAULIN
Brian Akins is at Rice University. David De Angelis is at Rice University. Maclean Gaulin is at the University of Utah. We thank Amit Seru (the Editor); an anonymous associate editor; two anonymous referees; Kerry Back; Anne Beatty; Jonathan Bitting; Alex Butler; Alan Crane; Kevin Crotty; Peter Demerjian; Dave Denis (discussant); Dick Dietrich; Jefferson Duarte; Aytekin Ertan; Janet Gao; Yaniv Grinstein; Gustavo Grullon; Matthew Gustafson (discussant); Yael Hochberg; Victoria Ivashina; Sébastien Michenaud; Yihui Pan (discussant); Andrea Pawliczek (discussant); Mitchell Petersen; Paul Povel; K. Ramesh; Michael Roberts; Daniel Saavedra; Doug Skinner; Ioannis Spyridopoulos; Joe Weber; James Weston; Regina Wittenberg-Moerman; Tzachi Zack; Feng Zhang (discussant); and seminar participants at London Business School, The Ohio State University, Rice University, University of Houston, the 2016 Academic Conference on Corporate Governance at Drexel University, the 2016 Annual Meeting of the Financial Management Association, the 2016 Annual Meeting of the Northern Finance Association, the 2016 Colorado Summer Accounting Research Conference, the 2016 Lone Star Accounting Conference, and the 2017 SFS Cavalcade North America Conference for helpful comments. We also thank Ryan Israelsen, Amir Sufi, and Ekaterina Volkova for sharing their data. We are grateful for the excellent research assistance provided by Wendy Chong, Asiya Kazi, Richie Ledo, Sophia Shao, and Richard Swartz. All remaining errors are our own. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorABSTRACT
Change of management restrictions (CMRs) in loan contracts give lenders explicit ex ante control rights over managerial retention and selection. This paper shows that lenders use CMRs to mitigate risks arising from CEO turnover, especially those related to the loss of human capital and replacement uncertainty, thereby providing evidence that human capital risk affects debt contracting. With a CMR in place, the likelihood of CEO turnover decreases by more than half, and future firm performance improves when retention frictions are important, suggesting that lenders can influence managerial turnover, even outside of default states, and help the borrower retain talent.
Supporting Information
| Filename | Description |
|---|---|
| jofi12893-sup-0001-InternetAppendix.pdf425.8 KB |
Appendix S1: Internet Appendix. |
| jofi12893-sup-0002-ReplicationCode.zip8.9 MB |
Replication code. |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Aghion, Philippe, and Patrick Bolton, 1992, An incomplete contracts approach to financial contracting, Review of Economic Studies 59, 473–494.
- Agrawal, Anup, and Charles R. Knoeber, 1998, Managerial compensation and the threat of takeover, Journal of Financial Economics 47, 219–239.
- Akins, Brian, David De Angelis, and Rustam Zufarov, 2019, Blocking block-formation: Evidence from private loan contracts, Working paper, Rice University.
- Bebchuk, Lucian A., K. J. Martijn Cremers, and Urs C. Peyer, 2011, The CEO pay slice, Journal of Financial Economics 102, 199–221.
- Arye Bebchuk, Lucian, and Jesse M. Fried, 2003, Executive compensation as an agency problem, Journal of Economic Perspectives 17, 71–92.
- Becker, Gary, 1964, Human Capital Theory (Columbia University Press, New York, NY).
- Berkovitch, Elazar, and Ronen Israel, 1996, The design of internal control and capital structure, Review of Financial Studies 9, 209–240.
- Billett, Matthew T., Tao-Hsien Dolly King, and David C. Mauer, 2004, Bondholder wealth effects in mergers and acquisitions: New evidence from the 1980s and 1990s, Journal of Finance 59, 107–135.
- Bolton, Patrick, Neng Wang, and Jinqiang Yang, 2019, Liquidity and risk management: Coordinating investment and compensation policies, Journal of Finance 74, 1363–1429.
- Bradley, Michael, and Michael R. Roberts, 2015, The structure and pricing of corporate debt covenants, Quarterly Journal of Finance 5, 1550001.
- Chava, Sudheer, Praveen Kumar, and Arthur Warga, 2010, Managerial agency and bond covenants, Review of Financial Studies 23, 1120–1148.
- Chava, Sudheer, and Michael R. Roberts, 2008, How does financing impact investment? the role of debt covenants, Journal of Finance 63, 2085–2121.
- Chen, Hui, and Gustavo Manso, 2017, Macroeconomic risk and debt overhang, Review of Corporate Finance Studies 6, 1–38.
- Cook, Douglas O., and John C. Easterwood, 1994, Poison put bonds: An analysis of their economic role, Journal of Finance 49, 1905–1920.
- Cremers, K. J. Martijn, and Yaniv Grinstein, 2014, Does the market for CEO talent explain controversial CEO pay practices? Review of Finance 18, 921–960.
- Denis, David J., and Jing Wang, 2014, Debt covenant renegotiations and creditor control rights, Journal of Financial Economics 113, 348–367.
- Diamond, Douglas W., 1984, Financial intermediation and delegated monitoring, Review of Economic Studies 51, 393–414.
- Diamond, Douglas W., 1991, Monitoring and reputation: The choice between bank loans and directly placed debt, Journal of Political Economy 99, 689–721.
- Eckbo, B. Espen, Karin S. Thorburn, and Wei Wang, 2016, How costly is corporate bankruptcy for the CEO? Journal of Financial Economics 121, 210–229.
- Edward Fee, C., and Charles J. Hadlock, 2003, Raids, rewards, and reputations in the market for managerial talent, Review of Financial Studies 16, 1315–1357.
- Ferreira, Daniel, Miguel A. Ferreira, and Beatriz Mariano, 2018, Creditor control rights and board independence, Journal of Finance 73, 2385–2423.
- Garmaise, Mark J., 2011, Ties that truly bind: Noncompetition agreements, executive compensation, and firm investment, Journal of Law, Economics, and Organization 27, 376–425.
- Gilson, Stuart C., 1989, Management turnover and financial distress, Journal of Financial Economics 25, 241–262.
- Goyal, Vidhan K., 2005, Market discipline of bank risk: Evidence from subordinated debt contracts, Journal of Financial Intermediation 14, 318–350.
- Graham, John, Si Li, and Jiaping Qiu, 2008, Corporate misreporting and bank loan contracting, Journal of Financial Economics 89, 44–61.
- Grinstein, Yaniv, 2006, The disciplinary role of debt and equity contracts: Theory and tests, Journal of Financial Intermediation 15, 419–443.
- Han, Bing, 2006, Insider ownership and firm value: Evidence from real estate investment trusts, Journal of Real Estate Finance and Economics 32, 471–493.
- Hart, Oliver, and John Moore, 1994, A theory of debt based on the inalienability of human capital, Quarterly Journal of Economics 109, 841–879.
- Heckman, James J., 1979, Sample selection bias as a specification error, Econometrica 47, 153–161.
- Israelsen, Ryan D., and Scott E. Yonker, 2017, Key human capital, Journal of Financial and Quantitative Analysis 52, 175–214.
- Ivashina, Victoria, 2009, Asymmetric information effects on loan spreads, Journal of Financial Economics 92, 300–319.
- Jensen, Michael C., and William H. Meckling, 1976, Theory of the firm: Managerial behavior, agency costs and ownership structure, Journal of Financial Economics 3, 305–360.
- Jenter, Dirk, and Fadi Kanaan, 2015, CEO turnover and relative performance evaluation, Journal of Finance 70, 2155–2184.
- Jenter, Dirk, and Katharina Lewellen, 2015, CEO preferences and acquisitions, Journal of Finance 70, 2813–2852.
- Kaplan, Steven N., and Bernadette A. Minton, 2012, How has CEO turnover changed? International Review of Finance 12, 57–87.
- Kaplan, Steven N., Berk A. Sensoy, and Per Strömberg, 2009, Should investors bet on the jockey or the horse? Evidence from the evolution of firms from early business plans to public companies, Journal of Finance 64, 75–115.
- Kaplan, Steven N., and Per Strömberg, 2003, Financial contracting theory meets the real world: An empirical analysis of venture capital contracts, Review of Economic Studies 70, 281–315.
- Karolyi, Stephen A., 2018, Personal lending relationships, Journal of Finance 73, 5–49.
- Kroszner, Randall S., and Philip E. Strahan, 2001, Bankers on boards: monitoring, conflicts of interest, and lender liability, Journal of Financial Economics 62, 415–452.
- Lee, Lung-Fei,1978, Unionism and wage rates: A simultaneous equations model with qualitative and limited dependent variables, International Economic Review 19, 415–433.
- Leichtling, Michael A., and Jeffery J. Wong, 1997, Commercial Loan Documentation Guide (Matthew Bender & Co.).
- Miller, Darius P., and Natalia Reisel, 2012, Do country-level investor protections affect security-level contract design? Evidence from foreign bond covenants, Review of Financial Studies 25, 408–438.
- Myers, Stewart C., 1977, Determinants of corporate borrowing, Journal of Financial Economics 5, 147–175.
- Nini, Greg, David C. Smith, and Amir Sufi, 2009, Creditor control rights and firm investment policy, Journal of Financial Economics 92, 400–420.
- Nini, Greg, David C. Smith, and Amir Sufi, 2012, Creditor control rights, corporate governance, and firm value, Review of Financial Studies 25, 1713–1761.
- Novaes, Walter, 2003, Capital structure choice when managers are in control: Entrenchment versus efficiency, Journal of Business 76, 49–82.
- Pan, Yihui, Tracy Yue Wang, and Michael S. Weisbach, 2018, How management risk affects corporate debt, Review of Financial Studies 31, 3491–3531.
- Parrino, Robert, 1997, CEO turnover and outside succession a cross-sectional analysis, Journal of Financial Economics 46, 165–197.
- Roberts, Michael R., 2015, The role of dynamic renegotiation and asymmetric information in financial contracting, Journal of Financial Economics 116, 61–81.
- Roberts, Michael R., and Amir Sufi, 2009, Renegotiation of financial contracts: Evidence from private credit agreements, Journal of Financial Economics 93, 159–184.
- Robinson, David T., and Toby E. Stuart, 2007, Financial contracting in biotech strategic alliances, Journal of Law & Economics 50, 559–596.
- Shleifer, Andrei, and Robert W. Vishny, 1997, A survey of corporate governance, Journal of Finance 52, 737–783.
- Sufi, Amir, 2007, Information asymmetry and financing arrangements: Evidence from syndicated loans, Journal of Finance 62, 629–668.
- Volkova, Ekaterina, 2017, Blockholders diversity and company value, Working paper, Cornell University.
