Agency cost of CEO perquisites in bank loan contracts
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Agency cost of CEO perquisites in bank loan contracts Chia‑Ying Chan1 · Iftekhar Hasan2,3,4 · Chih‑Yung Lin5
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract This study investigates the association between CEO perquisites and bank loan spreads. We collect detailed data on CEO perquisites from the proxy statements of S&P 500 firms between 1993 and 2015 to study this issue. The empirical evidence supports the agency cost view that the lending banks demand significantly higher returns (spread), more col‑ lateral, and stricter covenants from firms with higher CEO perquisites. We further confirm that the effect of these perquisites remains after we control for various corporate govern‑ ance and agency cost factors. We conclude that banks consider CEO perquisites as a type of agency cost when they make lending decisions. Keywords CEO perquisites · Agency cost · Loan spread · Corporate governance · Compensation schemes JEL Classification G21 · G32 · G34
1 Introduction This study investigates the association between CEO perquisites and bank loan spreads. The issues surrounding these perquisites continue to be headline news and have been widely discussed in the accounting and finance literature.1 An increasing number of studies 1
“The Toledo, Ohio, auto supplier, which emerged from Chapter 11 bankruptcy protection in Janu‑ ary 2008, spent $2.3 million last year on chartered planes to fly its chairman and chief executive, John
* Chih‑Yung Lin [email protected] Chia‑Ying Chan [email protected] Iftekhar Hasan [email protected] 1
Department of Business Administration, National Taipei University, New Taipei City, Taiwan
2
Fordham University, 45 Columbus Avenue, 5th Floor, New York, NY 10023, USA
3
Bank of Finland, Helsinki, Finland
4
University of Sydney, Sydney, Australia
5
Department of Information Management and Finance, National Chiao-Tung University, Hsinchu City, Taiwan
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C.-Y. Chan et al.
explore the role of CEO perquisites in corporate governance and firm decisions (Andrews et al. 2009, 2017; Gul et al. 2011; Grinstein et al. 2017; Luo et al. 2011; Marino and Zábo‑ jník 2008; Rajan and Wulf 2006; Yermack 2006).2 The recent studies in the compensa‑ tion literature have focused on the role of perquisites in executive compensation and their possible influence on shareholders’ wealth. However, the question of whether they affect the firms’ valuation in any way, such as in financing costs, remains. This study follows the main strands of theoretical and empirical literatures and adopts the agency view of CEO perquisites. Jensen and Meckling (1976) first proposed that since both equity and bonds could be issued with claims on a firm’s value, divergence between the principle (shareholder or bondholder) and the agent (manager) could exist. A potential agency cost between the manager and creditors (bank lender) can arise because the manager’s personal interest does not align with the creditor’s interests. For instance, the manager’s commit‑ me
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