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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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  • Cassell, Cory A.
  • Huang, Shawn X.
  • Manuel Sanchez, Juan
  • Stuart, Michael D.

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.

Suggested Citation

  • Cassell, Cory A. & Huang, Shawn X. & Manuel Sanchez, Juan & Stuart, Michael D., 2012. "Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies," Journal of Financial Economics, Elsevier, vol. 103(3), pages 588-610.
    • Handle: RePEc:eee:jfinec:v:103:y:2012:i:3:p:588-610
    DOI: 10.1016/j.jfineco.2011.10.008
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    Keywords

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

    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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