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Creditor control rights and executive bonus plans

Author

Listed:
  • Christopher S. Armstrong

    (Stanford University)

  • John D. Kepler

    (Stanford University)

  • Chongho Kim

    (Seoul National University)

  • David Tsui

    (Analysis Group)

Abstract

We study the extent to which creditors shape the executive bonus plans of their financially distressed borrowers. Financial distress can exacerbate agency conflicts between creditors and borrowers as concerns with underinvestment become more acute due to managerial myopia and debt overhang. Consequently, we expect creditors to exert their influence to ensure that these managers’ incentive-compensation plans encourage longer-term investments and directly reward outcomes that benefit creditors without exposing managers to unnecessary risk. We argue that bonus plans are an especially important way to provide these incentives because their flexibility allows creditors to more precisely target specific investment objectives. We find that borrowers’ bonus plans tend to have longer horizons and more convex payouts following covenant violations, especially when bonus plans can be a particularly effective way to address distress-related agency conflicts. Our evidence suggests that creditors protect their interests by exercising their control rights to shape their borrowers’ incentive-compensation plans.

Suggested Citation

  • Christopher S. Armstrong & John D. Kepler & Chongho Kim & David Tsui, 2025. "Creditor control rights and executive bonus plans," Review of Accounting Studies, Springer, vol. 30(3), pages 2724-2767, September.
    • Handle: RePEc:spr:reaccs:v:30:y:2025:i:3:d:10.1007_s11142-025-09876-6
    DOI: 10.1007/s11142-025-09876-6
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    Keywords

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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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