CEO performance-based grants’ vesting provisions and debt contracts: Evidence from GAAP,Non-GAAP and KPI metrics |
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Authors: | Teena Rachel Philip Daniela Sanchez Juan Manuel Sanchez |
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Affiliation: | Alvarez College of Business, Accounting, The University of Texas at San Antonio, San Antonio, Texas, USA |
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Abstract: | We examine the influence of CEOs’ equity and cash grants’ vesting provisions that are based on (i) accounting performance metrics prepared under US generally accepted principles (GAAP), (ii) non-GAAP performance metrics and (iii) key performance indicators (KPIs) on debt contracts. We find that grants with vesting provisions based on GAAP metrics and KPIs lead to a lower cost of debt, a lower likelihood of collateral requirements and less restrictive covenant terms. In contrast, performance-based grants with non-GAAP vesting provisions lead to a higher cost of debt, a higher likelihood of collateral requirements and more restrictive covenant terms. Supplementary analyses reveal that our results are incremental to other debtholder-friendly features in the CEO contracts, such as grants with debt-related performance measures and CEOs’ inside debt holdings, and robust to alternative variable definitions and specifications. Overall, our results suggest that debtholders understand the differing incentives associated with GAAP, non-GAAP and KPI-based performance measures, and incorporate these differences into debt contracts. |
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Keywords: | collateral requirements cost of debt covenant restrictions debt contracting executive compensation generally accepted accounting principles (GAAP) performance metrics key performance indicators (KPIs) loan spread non-GAAP performance metrics performance-based grants performance-contingent (p-c) grants performance-vesting grants |
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