Date of Award
Doctor of Philosophy
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 notice a smaller proportion of pay-at-risk. Additional results indicate that bank loan agreement significantly reduces the probability of CEO turnover in the subsequent year, and no change in the probability of CEO turnover in the three years following the loan. 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 and to secure employment. In particular, this evidence supports the "uniqueness" of bank loan relations.
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