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Investor Reactions to CEOs’ Inside Debt Incentives

51 Pages Posted: 8 Dec 2009 Last revised: 15 Feb 2011

Chenyang (Jason) Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

David Yermack

New York University (NYU) - Stern School of Business

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Date Written: February 13, 2011

Abstract

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

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

Chenyang Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

David Yermack (Contact Author)

New York University (NYU) - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY 10012-1126
United States
212-998-0357 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~dyermack

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