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Investor Reactions to CEOs’ Inside Debt Incentives

51 Pages Posted: 10 May 2010 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.

Keywords: Deferred Compensation, Inside Debt, Executive Compensation Disclosure

JEL Classification: G14, G32

Suggested Citation

Wei, Chenyang (Jason) and Yermack, David, Investor Reactions to CEOs’ Inside Debt Incentives (February 13, 2011). FRB of New York Staff Report No. 445. Available at SSRN: https://ssrn.com/abstract=1604046 or http://dx.doi.org/10.2139/ssrn.1604046

Chenyang Wei (Contact Author)

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

David Yermack

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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