41 Pages Posted: 6 Nov 2010 Last revised: 2 Dec 2014
Date Written: June 26, 2013
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: 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
By Jimmy Lee