The Determinants of CEO Inside Debt and its Components

Abstract

I use the new SEC disclosure rule of 2006 to examine the role of CEO inside debt (pension plans and deferred compensation plans) in CEO compensation problem. I find that the contribution ratio of deferred compensation to total cash compensation is positively related to firm size, firm liquidity status, firm default risk, and executive personal wealth. In addition, I find a non-linear relation between firm leverage and CEO inside debt. The investigation shows that the underlying reasons for this non-linear relation may relate to firm financial distress and CEO risk aversion. This finding suggests that inside debt plays a more complex role in mitigating the asset substitution problem.

Keywords: Inside Debt, Managerial Compensation, Capital Structure, Corporate Governance

JEL Classification: D23, G32, G38, J33, J44, M14, M52