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Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies

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Listed author(s):
  • Cassell, Cory A.
  • Huang, Shawn X.
  • Manuel Sanchez, Juan
  • Stuart, Michael D.
Registered author(s):

    Abstract

    CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage, and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X11002406
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 103 (2012)
    Issue (Month): 3 ()
    Pages: 588-610

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    Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:588-610
    DOI: 10.1016/j.jfineco.2011.10.008
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

    Keywords: Inside debt; Pensions; Deferred compensation; CEO incentives; Risk-seeking behavior;

    Find related papers by JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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