51 Pages Posted: 8 Dec 2009 Last revised: 15 Feb 2011
Date Written: February 13, 2011
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.
Suggested Citation: Suggested Citation
Wei, Chenyang (Jason) and Yermack, David, Investor Reactions to CEOs’ Inside Debt Incentives (February 13, 2011). NYU Working Paper No. FIN-09-020. Available at SSRN: https://ssrn.com/abstract=1519252
By Wei Cen
By Kevin Murphy