Keeping up with the Joneses or responding to job uncertainty? The spread of CEO severance agreements
نویسندگان
چکیده
The percentage of S&P500 firms that offer ex-ante severance agreements to their CEOs grew from 20% in 1993 to more than 55% in 2007 despite controversial discussions on executive severance contracts in the media and academic studies. In addition, about 40% of firms offer their CEOs severance contracts with cash-only payouts. Our paper focuses on this recent spread of ex-ante CEO severance agreement and provides evidence on the factors that have contributed to this spread and the firm’s decision to include equity components in the severance payout. We find that firms are more likely to start adopting ex-ante CEO severance agreement when the previous CEO was forced out, firm stock volatility is high, the firm’s expected bankruptcy risk is high, and the CEO turnover rate among the S&P 500 firms is high. Firms are also more likely to initiate ex-ante severance contracts when there are more firms adopting the ex-ante contracts in the same geographic area or when the firm’s industry leader has adopted the ex-ante agreements. When deciding on whether to offer the CEO a cash-only contract or a contract with equity components, firms consider the CEO’s existing equity ownership, their bankruptcy risk, the overall industry condition and whether their industry leaders have included equity components. Overall, our results suggest that the recent spread of ex-ante CEO severance agreements is an optimal response to the CEO’s job uncertainty and an outcome of the firms’ benchmarking practices. JEL classification: M12; G32; J6; G34
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