CEO overconfidence and debt covenant violations

Lartey, Theophilus; Danso, Albert

doi:10.1111/jfir.12271

Cited by 12 publications

(2 citation statements)

References 98 publications

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“…Voon et al (2022) examine the impacts of CEO overconfidence on loan covenant and find that firms with overconfident CEOs were laden with more restrictive loan covenant. Lartey and Danso (2022) show that CEO overconfidence is positively associated with violation of both performance-based and capital-based covenants. Previous papers find that banks used covenant number and covenant tightness/slack to alleviate their risks emanating from CEO compensation and CEO overconfidence.…”

Section: Introductionmentioning

confidence: 87%

Compensations, overconfidence and use of loan terms

Voon,

2023

IJMF

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PurposeThis paper contributes to the literature as follows. First, it examines if option and stock compensations raise creditor's risk, and which one is more important than the other. Second, it explores if CEO's compensation interacts with CEO overconfidence to raise creditor's risk. Third, it investigates how banks use different loan terms to alleviate their credit risk.Design/methodology/approach This study used advanced regression analysis and use of generalized methods of moment methodology.FindingsThe results show that option compensation is more important than stock compensation in raising credit risk; option compensation interacts with CEO overconfidence, giving rise to a much higher credit risk; and covenant usage is more important than other loan contract terms in mitigating credit risk given that covenant use could not be substituted away by using other loan contract terms such as increasing interest rate, reducing principal or shortening loan duration. This paper has practical implications for credit markets.Research limitations/implicationsThe main implication is that hand-collect data are available up to 2010.Practical implicationsIt informs creditors the potential sources of loan risk emanating from option rather than stock incentives; it informs creditors that option incentive interacts with CEO overconfidence rendering the credit risk bigger than expected, and it informs creditors the importance of using covenants vis-à-vis other loan contract terms for mitigating compensation and overconfidence risk.Social implicationsBanks are alerted to the risk due to the interaction between overconfidence and compensations, implying that overconfident managers remunerated with options compensations are more risky than overconfident managers who are not remunerated as such.Originality/valueThis paper is original: (1) The authors show that option compensation is more risky than stock compensation from viewpoint of creditors. This has not been assessed. (2) Interaction between managerial compensation and managerial overconfidence has not been assessed before. (3) Use of different loan contract terms to alleviate risk from overconfident managers (who are prone to over investment but who are innovative according to the literature) has not been evaluated.

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Section: Introductionmentioning

confidence: 87%

Compensations, overconfidence and use of loan terms

Voon,

2023

IJMF

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“…However, traditional corporate finance uses firm and managerial characteristics as standard control variables. CEOs' personal characteristics, such as their overconfidence or extraversion can lead to interpretational bias so that it could impact the capital structure of a firm (Lartey et al, 2020) and their behaviors to violate any debt covenants (Lartey and Danso, 2022). Some have taken a closer look at the parallel effect as determinants of executive compensation (Graham et al, 2012;Ryan and Wiggins, 2001) IJMF 19,5 and strategic decision-making (Bertrand and Schoar, 2003).…”

Section: Multi-level Imprinting Theorymentioning

confidence: 99%

Investigation of the multi-layers of imprinting on corporate working capital management

Davaadorj

Enkhtaivan

Weathers

2023

IJMF

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PurposeThe paper aims to investigate the imprinting effect on working capital (WC) management as higher-level managers' transition to chief executive officer (CEO) positions. This paper proposes that WC management defined as a shorter cash conversion cycle (CCC) can be carried forward to the new firm when the managers are appointed as a CEO.Design/methodology/approachThe authors employ a multivariate regression approach. The data in this study come from two sources: Execucomp which provides data for corporate managers of the largest 2,000 USA firms including S&P 1,500 US and Compustat which provides financial information of firms.FindingsThe authors find a positive imprinting effect of “new” CEOs on WC outcomes – proxied by the CCC. CCC shortens by approximately 16 days when CEOs are efficient managers at previous institutions, predominantly derived from improvements in inventory and payables. The effect is sensitive to individuals' age, familiarity with the industry and high-pressure circumstances.Practical implicationsThe paper includes important implications of WC management for firms to consider, especially during economic crises when liquidity management is a priority.Originality/valueThis paper extends the literature on the imprinting effect on managerial decision-making. The paper offers evidence of cooperative yet dynamic efforts in managing WC during CEO turnover events, which are unique findings.

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Corporate violations and bank debt cost: The insurance effect of corporate social responsibility

Li,

Sun,

Liu

et al. 2024

Corp Soc Responsibility Env

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In enhancing oversight within China's capital markets, it has become imperative to investigate the economic ramifications of corporate transgressions in the banking sector. This study applied the tenets of the insurance effect theory to scrutinize the transmission mechanism delineating the impact of corporate violations on bank debt costs, with a specific focus on the ameliorative role played by corporate social responsibility (CSR). The findings underscored a positive correlation between corporate violations and bank debt costs, while CSR emerged as a mitigating factor in this relationship. Notably, organizations demonstrating proactive engagement in CSR activities exhibited a capacity to attenuate the adverse influence of violations on bank debt costs. However, it was discerned that the insurance effect of CSR diminished when companies recurrently breached regulatory norms. These outcomes contribute substantively to fortifying capital market supervision, urging enterprises to conscientiously fulfill their social responsibilities to engender a more cautious approach from financial institutions.

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CEO overconfidence and debt covenant violations

Cited by 12 publications

References 98 publications

Compensations, overconfidence and use of loan terms

Compensations, overconfidence and use of loan terms

Investigation of the multi-layers of imprinting on corporate working capital management

Corporate violations and bank debt cost: The insurance effect of corporate social responsibility

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