Ex Ante Severance Agreements and Timely Disclosures of Bad News
Journal of Accounting, Auditing & Finance
This study explores the puzzle of CEO severance agreements by examining the association between the existence of ex ante severance agreements and the timeliness of bad news disclosures. Classifying severance agreements by type and the way boards grant them, this article documents a positive association between the timeliness of bad news disclosures and the existence of an ex ante single-trigger severance agreement, especially when it is granted alone. This association remains positive in the CEO’s last year of tenure where performance is poor. Further analyses show that this association is stronger among CEOs with a high-variable pay structure than among CEOs with a low-variable pay structure. These results suggest that an ex ante single-trigger severance agreement may play a role in forming timely disclosures of bad news and that paring it with a high-variable pay structure enhances the chance of its success.