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Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements

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  • STUART L. GILLAN
  • JAY C. HARTZELL
  • ROBERT PARRINO

Abstract

We report evidence on the determinants of whether the relationship between a firm and its Chief Executive Officer (CEO) is governed by an explicit (written) or an implicit agreement. We find that fewer than half of the CEOs of S&P 500 firms have comprehensive explicit employment agreements. Consistent with contracting theory, explicit agreements are more likely to be observed and are likely to have a longer duration in situations in which the sustainability of the relationship is less certain and where the expected loss to the CEO is greater if the firm fails to honor the agreement.

Suggested Citation

  • Stuart L. Gillan & Jay C. Hartzell & Robert Parrino, 2009. "Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements," Journal of Finance, American Finance Association, vol. 64(4), pages 1629-1655, August.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:4:p:1629-1655
    DOI: 10.1111/j.1540-6261.2009.01475.x
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