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Article
Bank Loan Agreement and CEO Compensation
Academy of Accounting & Financial Studies Journal
  • Amine Khayati, Kennesaw State University
  • Donald L. Ariail, Kennesaw State University
Department
Accountancy
Document Type
Article
Publication Date
5-1-2015
Disciplines
Abstract

Contrary to other forms of outside financing, the announcement of a bank loan agreement prompts a positive and significant market return. Throughout the literature, bank loans are deemed special and unique due to multiple benefits accruing to bank borrowers. The short-term positive market reaction is however inconsistent with the long-term underperformance of borrowing firms (Billet et al., 2006). We find that unlike shareholders, CEOs gain from the bank loan relation over the long-term. Specifically, we find that bank loan agreement elicits a significant increase in total compensation through an increase in non-performance based compensation components such as salary, bonus and other compensation. We also report a smaller proportion of performance based compensation following the bank agreement. Generally, the results suggest that subsequent to a major bank loan, CEOs seem to gain enough influence to shield their compensation from the firm 's underperformance. In particular this evidence supports the "uniqueness" of bank loan relations.

Citation Information
Amine Khayati and Donald L. Ariail. "Bank Loan Agreement and CEO Compensation" Academy of Accounting & Financial Studies Journal Vol. 19 Iss. 2 (2015) p. 1 - 18 ISSN: 1096-3685
Available at: http://works.bepress.com/amine-khayati/2/