Seeking safety

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

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

Research output: Contribution to journalArticle

112 Citations (Scopus)

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 2012
Externally publishedYes

Fingerprint

Financial policy
Firm investment
Investment policy
Chief executive officer
Riskiness
Debt
Safety
Liquidity
Risk seeking
Prediction
Pensions
Assets
Empirical evidence
Expenditure
Liability
Diversification
Stock returns
Financial leverage
Default risk

Keywords

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

ASJC Scopus subject areas

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

Cite this

Seeking safety : The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies. / Cassell, Cory A.; Huang, Xiaochuan; Manuel Sanchez, Juan; Stuart, Michael D.

In: Journal of Financial Economics, Vol. 103, No. 3, 03.2012, p. 588-610.

Research output: Contribution to journalArticle

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