TY - JOUR
T1 - Seeking safety
T2 - The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies
AU - Cassell, Cory A.
AU - Huang, Shawn X.
AU - Manuel Sanchez, Juan
AU - Stuart, Michael D.
N1 - Funding Information:
We gratefully acknowledge the many helpful comments and suggestions offered by the editor (G. William Schwert) and the anonymous reviewer. We also appreciate helpful comments from Larry Abbott, Karan Bhanot, Brian Daugherty, Mike Drake, Rebecca Files, Palani-Rajan Kadapakkam, Inder Khurana, Antonio Macias, James Myers, Linda Myers, Tom Omer, Gary Peters, Raynolde Pereira, Karen Pincus, Vern Richardson, Chad Stefaniak, Ed Swanson, John Wald, and workshop participants at the University of Arkansas, the University of Wisconsin—Milwaukee, and the 2010 Accounting Research Symposium at Brigham Young University. All errors are our own. Financial support from the Sam M. Walton College of Business at the University of Arkansas is greatly appreciated.
PY - 2012/3
Y1 - 2012/3
N2 - 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.
AB - 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.
KW - CEO incentives
KW - Deferred compensation
KW - Inside debt
KW - Pensions
KW - Risk-seeking behavior
UR - http://www.scopus.com/inward/record.url?scp=84855494276&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84855494276&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2011.10.008
DO - 10.1016/j.jfineco.2011.10.008
M3 - Article
AN - SCOPUS:84855494276
SN - 0304-405X
VL - 103
SP - 588
EP - 610
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 3
ER -