IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v75y2020i4p2095-2137.html
   My bibliography  Save this article

Debt Contracting on Management

Author

Listed:
  • BRIAN AKINS
  • DAVID DE ANGELIS
  • MACLEAN GAULIN

Abstract

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.

Suggested Citation

  • Brian Akins & David De Angelis & Maclean Gaulin, 2020. "Debt Contracting on Management," Journal of Finance, American Finance Association, vol. 75(4), pages 2095-2137, August.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:4:p:2095-2137
    DOI: 10.1111/jofi.12893
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jofi.12893
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jofi.12893?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Eckbo, B. Espen & Thorburn, Karin S. & Wang, Wei, 2016. "How costly is corporate bankruptcy for the CEO?," Journal of Financial Economics, Elsevier, vol. 121(1), pages 210-229.
    2. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 841-879.
    3. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
    4. Graham, John R. & Li, Si & Qiu, Jiaping, 2008. "Corporate misreporting and bank loan contracting," Journal of Financial Economics, Elsevier, vol. 89(1), pages 44-61, July.
    5. Dirk Jenter & Katharina Lewellen, 2015. "CEO Preferences and Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2813-2852, December.
    6. C. Edward Fee, 2003. "Raids, Rewards, and Reputations in the Market for Managerial Talent," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1315-1357.
    7. Roberts, Michael R., 2015. "The role of dynamic renegotiation and asymmetric information in financial contracting," Journal of Financial Economics, Elsevier, vol. 116(1), pages 61-81.
    8. Mark J. Garmaise, 2011. "Ties that Truly Bind: Noncompetition Agreements, Executive Compensation, and Firm Investment," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 27(2), pages 376-425.
    9. Philippe Aghion & Patrick Bolton, 1992. "An Incomplete Contracts Approach to Financial Contracting," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(3), pages 473-494.
    10. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    11. Cook, Douglas O & Easterwood, John C, 1994. "Poison Put Bonds: An Analysis of Their Economic Role," Journal of Finance, American Finance Association, vol. 49(5), pages 1905-1920, December.
    12. Patrick Bolton & Neng Wang & Jinqiang Yang, 2016. "Liquidity and Risk Management: Coordinating Investment and Compensation Policies," 2016 Meeting Papers 1703, Society for Economic Dynamics.
    13. Yihui Pan & Tracy Yue Wang & Michael S Weisbach, 2018. "How Management Risk Affects Corporate Debt," Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3491-3531.
    14. Parrino, Robert, 1997. "CEO turnover and outside succession A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 46(2), pages 165-197, November.
    15. Hui Chen & Gustavo Manso, 2017. "Macroeconomic Risk and Debt Overhang," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(1), pages 1-38.
    16. Bing Han, 2006. "Insider Ownership and Firm Value: Evidence from Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 32(4), pages 471-493, June.
    17. Daniel Ferreira & Miguel A. Ferreira & Beatriz Mariano, 2018. "Creditor Control Rights and Board Independence," Journal of Finance, American Finance Association, vol. 73(5), pages 2385-2423, October.
    18. Berkovitch, Elazar & Israel, Ronen, 1996. "The Design of Internal Control and Capital Structure," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 209-240.
    19. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    20. K. J. Martijn Cremers & Yaniv Grinstein, 2014. "Does the Market for CEO Talent Explain Controversial CEO Pay Practices?," Review of Finance, European Finance Association, vol. 18(3), pages 921-960.
    21. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    22. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    23. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    24. Stephen Adam Karolyi, 2018. "Personal Lending Relationships," Journal of Finance, American Finance Association, vol. 73(1), pages 5-49, February.
    25. Amir Sufi, 2007. "Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans," Journal of Finance, American Finance Association, vol. 62(2), pages 629-668, April.
    26. Steven N. Kaplan & Per Strömberg, 2003. "Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 70(2), pages 281-315.
    27. Bebchuk, Lucian A. & Cremers, K.J. Martijn & Peyer, Urs C., 2011. "The CEO pay slice," Journal of Financial Economics, Elsevier, vol. 102(1), pages 199-221, October.
    28. Michael Bradley & Michael R. Roberts, 2015. "The Structure and Pricing of Corporate Debt Covenants," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 5(02), pages 1-37.
    29. Roberts, Michael R. & Sufi, Amir, 2009. "Renegotiation of financial contracts: Evidence from private credit agreements," Journal of Financial Economics, Elsevier, vol. 93(2), pages 159-184, August.
    30. Ferreira, Daniel & Ferreira, Miguel A. & Mariano, Beatriz, 2018. "Creditor control rights and board independence," LSE Research Online Documents on Economics 84463, London School of Economics and Political Science, LSE Library.
    31. Walter Novaes, 2003. "Capital Structure Choice When Managers Are in Control: Entrenchment versus Efficiency," The Journal of Business, University of Chicago Press, vol. 76(1), pages 49-82, January.
    32. Greg Nini & David C. Smith & Amir Sufi, 2012. "Creditor Control Rights, Corporate Governance, and Firm Value," Review of Financial Studies, Society for Financial Studies, vol. 25(6), pages 1713-1761.
    33. Denis, David J. & Wang, Jing, 2014. "Debt covenant renegotiations and creditor control rights," Journal of Financial Economics, Elsevier, vol. 113(3), pages 348-367.
    34. Grinstein, Yaniv, 2006. "The disciplinary role of debt and equity contracts: Theory and tests," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 419-443, October.
    35. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    36. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    37. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    38. Matthew T. Billett & Tao-Hsien Dolly King & David C. Mauer, 2004. "Bondholder Wealth Effects in Mergers and Acquisitions: New Evidence from the 1980s and 1990s," Journal of Finance, American Finance Association, vol. 59(1), pages 107-135, February.
    39. Darius P. Miller & Natalia Reisel, 2012. "Do Country-level Investor Protections Affect Security-level Contract Design? Evidence from Foreign Bond Covenants," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 408-438.
    40. Nini, Greg & Smith, David C. & Sufi, Amir, 2009. "Creditor control rights and firm investment policy," Journal of Financial Economics, Elsevier, vol. 92(3), pages 400-420, June.
    41. Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
    42. Goyal, Vidhan K., 2005. "Market discipline of bank risk: Evidence from subordinated debt contracts," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 318-350, July.
    43. Israelsen, Ryan D. & Yonker, Scott E., 2017. "Key Human Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(1), pages 175-214, February.
    44. David T. Robinson & Toby E. Stuart, 2007. "Financial Contracting in Biotech Strategic Alliances," Journal of Law and Economics, University of Chicago Press, vol. 50(3), pages 559-596.
    45. Steven N. Kaplan & Bernadette A. Minton, 2012. "How Has CEO Turnover Changed?," International Review of Finance, International Review of Finance Ltd., vol. 12(1), pages 57-87, March.
    46. Lee, Lung-Fei, 1978. "Unionism and Wage Rates: A Simultaneous Equations Model with Qualitative and Limited Dependent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 415-433, June.
    47. Agrawal, Anup & Knoeber, Charles R., 1998. "Managerial compensation and the threat of takeover," Journal of Financial Economics, Elsevier, vol. 47(2), pages 219-239, February.
    48. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    49. Steven N. Kaplan & Berk A. Sensoy & 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, American Finance Association, vol. 64(1), pages 75-115, February.
    50. Sudheer Chava & Praveen Kumar & Arthur Warga, 2010. "Managerial Agency and Bond Covenants," Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1120-1148, March.
    51. Kroszner, Randall S. & Strahan, Philip E., 2001. "Bankers on boards: *1: monitoring, conflicts of interest, and lender liability," Journal of Financial Economics, Elsevier, vol. 62(3), pages 415-452, December.
    52. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    2. Eunkyung Lee, 2023. "The Transmission of Monetary Policy to Corporate Investment: The Role of Loan Renegotiation," Economics Discussion Paper Series 2310, Economics, The University of Manchester.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhiming Ma & Derrald Stice & Christopher Williams, 2022. "What's my style? Supply‐side determinants of debt covenant inclusion," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(3-4), pages 461-490, March.
    2. Freudenberg, Felix & Imbierowicz, Björn & Saunders, Anthony & Steffen, Sascha, 2017. "Covenant violations and dynamic loan contracting," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 540-565.
    3. Wenlian Gao & Feifei Zhu & Kai Chen, 2023. "The role of bank lenders in firm leverage adjustments," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(1), pages 63-97, February.
    4. Lin, Luca X., 2022. "Taking no chances: Lender concentration and corporate acquisitions," Journal of Corporate Finance, Elsevier, vol. 76(C).
    5. Prilmeier, Robert, 2017. "Why do loans contain covenants? Evidence from lending relationships," Journal of Financial Economics, Elsevier, vol. 123(3), pages 558-579.
    6. Ambrocio, Gene & Colak, Gonul & Hasan, Iftekhar, 2022. "Commitment or constraint? The effect of loan covenants on merger and acquisition activity," Finance Research Letters, Elsevier, vol. 47(PB).
    7. Matthias Kiefer & Edward Jones & Andrew Adams, 2016. "Principals, Agents and Incomplete Contracts: Are Surrender of Control and Renegotiation the Solution?," CFI Discussion Papers 1603, Centre for Finance and Investment, Heriot Watt University.
    8. Armstrong, Christopher S. & Guay, Wayne R. & Weber, Joseph P., 2010. "The role of information and financial reporting in corporate governance and debt contracting," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 179-234, December.
    9. Marc Arnold & Ramona Westermann, 2023. "Debt Renegotiations Outside Distress," Review of Finance, European Finance Association, vol. 27(4), pages 1183-1228.
    10. Pappas, Kostas & Walsh, Eamonn & Xu, Alice Liang, 2019. "Real earnings management and loan contract terms," The British Accounting Review, Elsevier, vol. 51(4), pages 373-401.
    11. Beyhaghi, Mehdi & Nguyen, Ca & Wald, John K., 2019. "Institutional investors and loan dynamics: Evidence from loan renegotiations," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 482-505.
    12. Xu Chong Bo & Wenyi Li & Jing Shi & Yi Zheng & Qing Zhou, 2021. "Relationship lending and bank loan covenant violations," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5847-5878, December.
    13. Wang, Jing, 2017. "Debt covenant design and creditor control rights: Evidence from the tightest covenant," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 331-352.
    14. Isin, Adnan Anil, 2018. "Tax avoidance and cost of debt: The case for loan-specific risk mitigation and public debt financing," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 344-378.
    15. Keil, Jan, 2023. "Lending relationships when creditors are in control," Journal of Corporate Finance, Elsevier, vol. 79(C).
    16. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    17. Daniel Cohen & Bin Li & Ningzhong Li & Yun Lou, 2022. "Major government customers and loan contract terms," Review of Accounting Studies, Springer, vol. 27(1), pages 275-312, March.
    18. Reisel, Natalia, 2014. "On the value of restrictive covenants: Empirical investigation of public bond issues," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 251-268.
    19. Nikolaev, Valeri V., 2018. "Scope for renegotiation in private debt contracts," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 270-301.
    20. Amiraslani, Hami & Donovan, John & Phillips, Matthew A. & Wittenberg-Moerman, Regina, 2023. "Contracting in the Dark: The rise of public-side lenders in the syndicated loan market," Journal of Accounting and Economics, Elsevier, vol. 76(1).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:75:y:2020:i:4:p:2095-2137. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.