Explicit vs. implicit contracts: Evidence from CEO employment agreements
Gillan, Stuart L; Hartzell, Jay C; Parrino, Robert
We report evidence on the choice between explicit (written) and implicit contracting for a sample of agreements between CEOs and their firms. Fewer than half of S&P 500 CEOs have explicit contracts. Evidence on the determinants of whether a CEO’s contract is explicit or implicit is consistent with contracting theory. The likelihood that a CEO has an explicit employment agreement is positively related to the investment in human capital required of the CEO and the expected loss to the CEO if the firm reneges on the agreement and negatively related to the degree of uncertainty surrounding the relationship and the firm’s labor market reputation. These factors are similarly associated with the duration of explicit agreements.
Conference: University of Otago, Department of Finance, Seminar, Commerce 5.37, University of Otago, Dunedin, Otago
Keywords: explicit employment agreement; CEO; firm’s labor market reputation. implicit employment agreement,; Human capital