Managerial Ownership of Debt and Corporate Financial Reporting

41 Pages Posted: 6 Nov 2010 Last revised: 2 Dec 2014

Cong Wang

China Europe International Business School (CEIBS)

Fei Xie

University of Delaware

Xiangang Xin

City University of Hong Kong

Date Written: June 26, 2013

Abstract

We examine whether inside debt held by managers in the form of pension benefits and deferred compensation affects corporate financial reporting practice. We find significant evidence of less conservative financial reporting at firms where CEOs hold more inside debt. This is consistent with the hypothesis that inside debt dampens managerial risk taking incentive and alleviates debtholders’ concern for asset substitution and expropriation, thereby reducing firms’ need for accounting conservatism to address agency costs of debt. We also find that the negative effect of inside debt on accounting conservatism exhibits several cross-sectional variations as theory predicts and that it is robust to correcting for the endogeneity of inside debt.

Keywords: Managerial Ownership of Debt, Inside Debt, Deferred Compensation, Executive Pension, Accounting Conservatism, Agency Costs of Debt

JEL Classification: G32, M41

Suggested Citation

Wang, Cong and Xie, Fei and Xin, Xiangang, Managerial Ownership of Debt and Corporate Financial Reporting (June 26, 2013). Available at SSRN: https://ssrn.com/abstract=1703478 or http://dx.doi.org/10.2139/ssrn.1703478

Cong Wang

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

Fei Xie (Contact Author)

University of Delaware ( email )

Newark, DE 19711
United States

Xiangang Xin

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
Hong Kong

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