Explicit versus Implicit Contracts: Evidence from CEO Employment Agreements





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    • Gillan is at the Rawls College of Business Administration, Texas Tech University, and Hartzell and Parrino are at the McCombs School of Business, University of Texas at Austin. We would like to thank Nell Minow and Ric Marshall of The Corporate Library and Kevin Murphy from the University of Southern California for graciously providing data for this study. We also thank the editors, Robert Stambaugh, Campbell Harvey, and John Graham; an anonymous referee; Andres Almazan; Jeff Coles; David Yermack; and seminar participants at the 2006 American Finance Association annual meeting, American University, Arizona State University, Babson College, University of Cincinnati, Louisiana State University, Ohio State University, Oklahoma State University, Penn State University, University of South Florida, Southern Methodist University, Texas Tech University, University of Oklahoma, University of Tennessee, University of Texas at Austin, University of Texas at Dallas, and University of Texas at San Antonio for helpful suggestions. We are grateful to Ajit Balasubramanian, Darryl Bert, Shirley Birman, Laura Gillan, Jie Lian, Murari Mani, Saumya Mohan, Chris Parsons, and Haiying Zhou for providing excellent research assistance.


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.