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http://ssrn.com/abstract=1884964
 
 

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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


Arizona State University (ASU) - School of Accountancy

Juan Manuel Sanchez


Texas Tech University

Michael D. Stuart


Vanderbilt University - 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

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

Suggested Citation

Cassell, Cory A. and Huang, Shawn X. and 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
Arizona State University (ASU) - School of Accountancy ( email )
Tempe, AZ 85287
United States
Juan Manuel Sanchez (Contact Author)
Texas Tech University ( email )
Lubbock, TX 79409
United States
Michael D. Stuart
Vanderbilt University - Accounting ( email )
Nashville, TN 37203
United States
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