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

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

Research output: Contribution to journalArticle

126 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)588-610
Number of pages23
JournalJournal of Financial Economics
Volume103
Issue number3
DOIs
StatePublished - Mar 1 2012
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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