CEO Power and Bank Loan Covenant Restrictiveness

• Main Authors: Hue-Trinh Le, 黎惠貞
• Other Authors: Hsiang-Ping Tsai
• Format: Others
• Language: en_US
• Published: 2017
• Online Access: http://ndltd.ncl.edu.tw/handle/kcb6q5

碩士 === 元智大學 === 財務金融暨會計碩士班(財務金融學程) === 105 === Existing studies illustrate that the centralization of power in CEOs creates a large influence on firm performance. The CEOs are directly responsible for decision making, but whether these strategic decisions are beneficial or detrimental for the firms depends on CEOs’ perspectives of interest. One direction of making decision process of powerful CEO is high agency problem occurring when CEOs act beneficially themselves. Such a situation motivates lenders use certain mechanisms (covenants in particular) to protect their claims. Another side is the fact that when the power is used efficiently, the chief executive officers are more likely to operate firms well. Notice that lenders will satisfy with CEO’s performance, leading to the relaxation in firm monitoring. Hence, this paper’s aim is to investigate the relationship between covenants used and CEOs power affected by agency problems and working efficiency and the key concept of newly-appointed CEOs - Covenant restriction relationship. By applying the Negative Binominal regressions for different covenant restrictiveness proxies, we find that the meaning of being president and chairman or the sole director of CEOs is more robust. This suggests when CEOs are granted more than one important positions in the firms, they are more likely to support the agency problem story, leading to higher level of covenant restrictions. However, the opposite is true for the case that CEOs are also firm founders or get higher compensation compared to top five executives. The results are still the same for the estimation of early tenured CEO effects.