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Does CEO inside debt compensation benefit both shareholders and debtholders?

Author

Listed:
  • Nilakshi Borah

    () (University of Wisconsin-La Crosse)

  • Hui Liang James

    () (University of Texas at Tyler)

  • Jung Chul Park

    () (University of South Florida)

Abstract

We examine whether the proportion of CEO inside debt holdings (pension and deferred compensation) to stock holdings benefit both shareholders and debtholders by relating CEO inside debt to a firm’s dividend payout policies. Based on the positive association of CEO inside debt and the propensity and the size of the dividend payout, we find that firms paying their CEOs with large inside debt present the lower cost of debt and default risk, and these benefits transfer to better firm performance and valuation. Moreover, we find that CEO inside debt is related to superior firm performance only in dividend-paying firms. Dividends tend to increase when firms with high agency costs of equity use inside debt. We conclude that dividends serve as a channel through which CEO inside debt compensation mitigates both agency costs of debt and agency costs of equity.

Suggested Citation

  • Nilakshi Borah & Hui Liang James & Jung Chul Park, 2020. "Does CEO inside debt compensation benefit both shareholders and debtholders?," Review of Quantitative Finance and Accounting, Springer, vol. 54(1), pages 159-203, January.
  • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:1:d:10.1007_s11156-018-00786-0
    DOI: 10.1007/s11156-018-00786-0
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    Keywords

    Inside debt; Dividend policy; Firm valuation; Agency theory;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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