Seeking Safety: The Relation between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies

57 Pages Posted: 15 Jul 2011 Last revised: 16 Jan 2012

See all articles by Cory A. Cassell

Cory A. Cassell

University of Arkansas

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy

Juan Manuel Sanchez

University of Texas at San Antonio

Michael D. Stuart

Vanderbilt University - Accounting

Date Written: July 13, 2011

Abstract

CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.

Keywords: Inside Debt, Pensions, Deferred Compensation, CEO Incentives, Risk-Seeking Behaviour

JEL Classification: G00, G32, G33

Suggested Citation

Cassell, Cory A. and Huang, Shawn X. and Sanchez, Juan Manuel and Stuart, Michael D., Seeking Safety: The Relation between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies (July 13, 2011). Journal of Financial Economics, Vol. 103, No. 3, pp. 588-610, 2012. Available at SSRN: https://ssrn.com/abstract=1884964

Cory A. Cassell

University of Arkansas ( email )

Business Bldg. 454
Fayetteville, AR 72701
United States

Shawn X. Huang

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Juan Manuel Sanchez (Contact Author)

University of Texas at San Antonio ( email )

One UTSA Circle
San Antonio, TX 78249
United States

Michael D. Stuart

Vanderbilt University - Accounting ( email )

Nashville, TN 37203
United States

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