Can Creditors Restrict Managerial Investment Behavior in Distressed Firms?

Pryshchepa, Oksana; Aretz, Kevin; Banerjee, Shantanu

doi:10.2139/ssrn.2133504

Cited by 2 publications

(1 citation statement)

References 24 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Z -Score and CHS Prob. are also used by Pryshchepa et al (2012) to measure distress, ex ante . Our mean (median) Z -Score of 3.995 (2.950) is consistent with that reported by Kadan and Swinkels (2008) and Pryshchepa et al (2012).…”

Section: Descriptive Statisticsmentioning

confidence: 99%

CEO incentive pay around performance declines

Canil

Rosser

2018

View full text Add to dashboard Cite

Purpose The authors study stock and option grants around abrupt performance declines for continuing CEOs and find that firms facing abrupt financial declines grant more options than stock, while firms facing operational decline grant more stock than options. Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. The paper aims to discuss these issues. Design/methodology/approach To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. Findings Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. Originality/value Several studies examine the relationship between poor performance and compensation of newly appointed CEOs. But firms regularly employ retention or incentive plans when experiencing distress to prevent critical employees from leaving when they are most needed (Goyal and Wang, 2017). Employee turnover results in a loss of continuity coupled with high search and training costs for replacement personnel. Beneish et al. (2017) find that 57 percent of CEOs associated with intentional misreporting retain their jobs, implying the costs of removing CEOs is high, especially if the incumbent CEO has a strong track record relative to industry peers prior to the period before the misreporting begins. The board fires the CEO if future firm value under the CEO is expected to be lower than under the best alternative CEO less adjustment costs (e.g. search costs, severance pay).

show abstract

Section: Descriptive Statisticsmentioning

confidence: 99%

CEO incentive pay around performance declines

Canil

Rosser

2018

View full text Add to dashboard Cite

show abstract

Creditor Control Rights and Managerial Risk Shifting

Esmer

2010

SSRN Journal

View full text Add to dashboard Cite

Recent evidence shows that corporate policies change significantly following financial covenant violations. These changes are attributed to increased creditor influence over borrowing firms in ways that benefit both shareholders and debtholders. In this paper, I investigate whether shareholders engage in activities counter to creditors' interests following violations. I find that the expected negative relation between volatility and investment reverses for firms once they violate a covenant, consistent with risk-shifting behavior. This behavior is more pronounced in firms with high CEO portfolio sensitivity to stock return volatility and firms with high CEO equity ownership. Moreover, I document a significant increase in firm risk in the year following the violation. Overall, these findings suggest that even in the presence of increased creditor control risk shifting still occurs. The prior conclusions that shareholder-debtholder incentives are congruent at violations do not appear to be the case.

show abstract

Can Creditors Restrict Managerial Investment Behavior in Distressed Firms?

Cited by 2 publications

References 24 publications

CEO incentive pay around performance declines

CEO incentive pay around performance declines

Creditor Control Rights and Managerial Risk Shifting

Contact Info

Product

Resources

About