Managerial Ownership of Debt and Accounting Conservatism

Abstract:     
We examine the relation between accounting conservatism and managerial ownership of debt in the form of deferred compensation and pension benefits. Consistent with debt holdings by managers mitigating the debtholder-shareholder conflicts and reducing debtholders’ demand for accounting conservatism, we find significant evidence of less conservative financial reporting at firms whose CEOs have accumulated more deferred compensation and pension benefits. This negative relation is more pronounced in firms with higher leverage, less tangible assets, higher bankruptcy risk, and more growth options, i.e., firms characterized by higher expected agency costs of debt. Our results are robust to correcting for potential endogeneity of managerial ownership of debt and to using a number of alternative accounting conservatism measures. We also find that debt holdings by a firm’s CFO and its top management team reduce accounting conservatism as well.

Number of Pages in PDF File: 49

Keywords: Managerial Ownership of Debt, Inside Debt, Deferred Compensation, Executive Pension, Accounting Conservatism, Agency Costs of Debt

JEL Classification: G32, M41

working papers series