Investor Reactions to CEOs’ Inside Debt Incentives
Chenyang (Jason) Wei
Federal Reserve Banks - Federal Reserve Bank of Philadelphia
NYU Stern School of Business
February 13, 2011
FRB of New York Staff Report No. 445
Pensions and deferred compensation represent substantial components of CEO incentives. We study stockholder and bondholder reactions to companies’ initial reports of CEOs’ inside debt positions following a 2007 SEC disclosure reform. We find that bond prices rise, equity prices fall, and the volatility of both securities drops for firms whose CEOs have sizeable defined benefit pensions or deferred compensation. Similar changes occur for credit default swap spreads and exchange traded options. The results indicate a reduction in firm risk, a transfer of value from equity toward debt, and an overall destruction of enterprise value when CEOs’ inside debt holdings are large.
Number of Pages in PDF File: 51
Keywords: Deferred Compensation, Inside Debt, Executive Compensation Disclosure
JEL Classification: G14, G32working papers series
Date posted: May 10, 2010 ; Last revised: February 15, 2011
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