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Seeking Safety: The Relation between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies


Cory A. Cassell


University of Arkansas

Shawn X. Huang


University of Arkansas

Juan Manuel Sanchez


University of Arkansas - Department of Accounting

Michael D. Stuart


University of Arkansas - Department of Accounting
July 13, 2011

Journal of Financial Economics, Vol. 103, No. 3, pp. 588-610, 2012

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.

Number of Pages in PDF File: 57

Keywords: Inside Debt, Pensions, Deferred Compensation, CEO Incentives, Risk-Seeking Behaviour

JEL Classification: G00, G32, G33

Accepted Paper Series


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Date posted: July 15, 2011 ; Last revised: January 16, 2012

Suggested Citation

Cassell, Cory A., Huang, Shawn X., Sanchez, Juan Manuel and Stuart, Michael D., Seeking Safety: The Relation between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies (July 13, 2011). Journal of Financial Economics, Vol. 103, No. 3, pp. 588-610, 2012. Available at SSRN: http://ssrn.com/abstract=1884964

Contact Information

Cory A. Cassell
University of Arkansas ( email )
Business Bldg. 454
Fayetteville, AR 72701
United States
Shawn X. Huang
University of Arkansas ( email )
Business Bldg. 454
Fayetteville, AR 72701
United States
Juan Manuel Sanchez (Contact Author)
University of Arkansas - Department of Accounting ( email )
Business Building 401
Office 453
Fayetteville, AR 72701
United States
Michael D. Stuart
University of Arkansas - Department of Accounting ( email )
Business Bldg. 454
Fayetteville, AR 72701
United States
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