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Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements
Author(s) -
GILLAN STUART L.,
HARTZELL JAY C.,
PARRINO ROBERT
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2009.01475.x
Subject(s) - chief executive officer , honor , executive compensation , officer , business , duration (music) , economics , monetary economics , microeconomics , management , political science , law , incentive , computer science , operating system , art , literature
ABSTRACT We report evidence on the determinants of whether the relationship between a firm and its Chief Executive Officer (CEO) is governed by an explicit (written) or an implicit agreement. We find that fewer than half of the CEOs of S&P 500 firms have comprehensive explicit employment agreements. Consistent with contracting theory, explicit agreements are more likely to be observed and are likely to have a longer duration in situations in which the sustainability of the relationship is less certain and where the expected loss to the CEO is greater if the firm fails to honor the agreement.