The use of cash flows metrics in CEO compensation and the design of loan contracts

IF 3.2 3区管理学 Q1 BUSINESS, FINANCE

Contemporary Accounting Research Pub Date : 2024-10-10 DOI:10.1111/1911-3846.12981

Guojin Gong, Xin Daniel Jiang, Biqin Xie

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引用次数: 0

Abstract

This study examines whether using cash-flow-based performance metrics (CFM) in CEO compensation contracts affects the design of loan contracts. Cash-flow-based performance evaluation explicitly motivates the CEO to improve the firm's cash flows, which may enhance debt repayment ability and reduce credit risk. We thus hypothesize that lenders, anticipating this incentive effect, offer lower loan spreads and reduce cash-flow-based performance covenants when firms use CFM in CEO compensation contracts. Consistent with our expectation, the use of CFM is associated with lower loan spreads and less use of cash-flow-based performance covenants. These findings remain robust after we account for endogeneity. Furthermore, these results are more pronounced in firms with higher credit risk or risk of cash flow shortfalls, suggesting that lenders consider internally generated cash flows more valuable when borrowers face higher external financing costs or have greater liquidity concerns. Additionally, we find that using CFM is associated with improved cash flow performance and enhanced creditworthiness, which supports the notion that CFM is an effective incentive mechanism. Overall, our evidence suggests that lenders consider the incentive effect of cash-flow-based performance evaluation in the debt contracting process.

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现金流量指标在CEO薪酬和贷款合同设计中的应用

本研究探讨在CEO薪酬契约中使用基于现金流的绩效指标（CFM）是否会影响贷款契约的设计。基于现金流量的绩效评价明确激励CEO改善公司的现金流量，从而提高偿债能力，降低信用风险。因此，我们假设，当企业在CEO薪酬合同中使用CFM时，贷款人预期到这种激励效应，提供更低的贷款利差并减少基于现金流的绩效契约。与我们的预期一致，CFM的使用与较低的贷款利差和较少使用基于现金流的绩效契约有关。在我们考虑了内生性之后，这些发现仍然是强有力的。此外，这些结果在信用风险或现金流短缺风险较高的公司中更为明显，这表明当借款人面临更高的外部融资成本或更大的流动性担忧时，贷款人认为内部产生的现金流更有价值。此外，我们发现使用CFM与改善现金流绩效和提高信誉有关，这支持了CFM是一种有效激励机制的观点。总体而言，我们的证据表明，贷款人在债务承包过程中考虑了基于现金流的绩效评估的激励效应。

本文章由计算机程序翻译，如有差异，请以英文原文为准。

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来源期刊

Contemporary Accounting Research BUSINESS, FINANCE-

CiteScore

6.20

自引率

11.10%

发文量

期刊介绍： Contemporary Accounting Research (CAR) is the premiere research journal of the Canadian Academic Accounting Association, which publishes leading- edge research that contributes to our understanding of all aspects of accounting"s role within organizations, markets or society. Canadian based, increasingly global in scope, CAR seeks to reflect the geographical and intellectual diversity in accounting research. To accomplish this, CAR will continue to publish in its traditional areas of excellence, while seeking to more fully represent other research streams in its pages, so as to continue and expand its tradition of excellence.