References (12)



Inside Debt and Debt Incentives: Evidence from the 2008 Financial Crisis

Joseph Taylor Halford

University of Wisconsin Milwaukee

Mingming Qiu

CUNY Baruch College

March 15, 2012

We study the rationale for firms’ use of inside debt by exploiting the relation between firms’ default risk and inside debt (pension and deferred compensation). The classical principal-agent theory indicates that the agency costs of debt are higher when the firm’s debt is riskier. We test whether firms that are likely to face more severe agency problems of debt provide more debt incentives. We provide evidence that less distressed firms use more inside debt. The 2008 financial crisis significantly increases firms’ default risk. This exogenous shift in firms’ default risk offers an opportunity to provide evidence on the potential causal relation between default risk and inside debt. Based on a difference-in-differences approach, we find that firms with increased default risk during the crisis period increase their inside debt significantly less than those firms with decreased default risk. Overall, we find little evidence to support the hypothesis that inside debt is used to alleviate the agency costs of debt. Anecdotal evidence suggests that personal tax concerns appear to be an important determinant for inside debt usage.

Number of Pages in PDF File: 34

Keywords: Inside debt, Compensation, Financial crisis, Debt incentives, Equity incentives

JEL Classification: G34, G38, M52

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Date posted: February 15, 2012 ; Last revised: April 14, 2015

Suggested Citation

Halford, Joseph Taylor and Qiu, Mingming, Inside Debt and Debt Incentives: Evidence from the 2008 Financial Crisis (March 15, 2012). Available at SSRN: http://ssrn.com/abstract=2005205 or http://dx.doi.org/10.2139/ssrn.2005205

Contact Information

Joseph Taylor Halford
University of Wisconsin Milwaukee ( email )
3203 N Maryland Ave
Sheldon B Lubar School of Business
Milwuakee, WI 53211
United States
Mingming Qiu (Contact Author)
CUNY Baruch College ( email )
17 Lexington Avenue
New York, NY 10021
United States
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