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

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  • Rhodes, Adrienne

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.

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  • Rhodes, Adrienne, 2016. "The relation between earnings-based measures in firm debt contracts and CEO pay sensitivity to earnings," Journal of Accounting and Economics, Elsevier, vol. 61(1), pages 1-22.
    • Handle: RePEc:eee:jaecon:v:61:y:2016:i:1:p:1-22
    DOI: 10.1016/j.jacceco.2015.11.002
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    Cited by:

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    3. Truc (Peter) Do, 2023. "The impact of board ethnic diversity on executive pay‐to‐performance sensitivity: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3643-3674, September.
    4. Zhi Li & Lingling Wang & Karen Wruck, 2020. "Accounting‐Based Compensation and Debt Contracts," Contemporary Accounting Research, John Wiley & Sons, vol. 37(3), pages 1475-1511, September.
    5. Zhang, Yuyang & Uchida, Konari & Dong, Liping, 2020. "External financing and earnings management: Evidence from international data," Research in International Business and Finance, Elsevier, vol. 54(C).
    6. Christian Hofmann & Steven Huddart & Thomas Pfeiffer, 2023. "An analysis of net-outcome contracting with applications to equity-based compensation," Review of Accounting Studies, Springer, vol. 28(3), pages 1657-1689, September.

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