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Inside Debt and Stock Price Performance

54 Pages Posted: 14 Mar 2012 Last revised: 14 Sep 2014

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management

Gokhan Yilmaz

University of Minnesota Duluth

Date Written: August 2013


We analyze whether paying CEOs with inside debt (pensions and deferred compensation) benefits shareholders. We find that stock price reaction to initial revelation of inside debt information following the SEC amendment is significant and positive, albeit delayed. In the subsequent revelation of information pertaining to the use of inside debt for firms that disclosed no inside debt compensation in the first revelation, the stock price response is immediate and significantly positive. In the recent financial crisis, firms that use a combination of inside debt and equity in compensating their CEOs had better stock price performance than firms that pay their CEOs with equity, but no inside debt. Both groups of firms did not perform substantially different in post-crisis. During the crisis, among firms that use inside debt, firms that employ a debt bias in compensation (debt-to-equity compensation of the CEO exceeds the corporate leverage ratio) performed better than firms that employ an equity bias. Our evidence support Edmans and Liu (2011)’s theoretical propositions that optimal level of inside debt is positive, pure equity compensation is inefficient and, that a debt bias is desired when insolvency is likely. Findings have implications for firms and policymakers in terms of risk management through managerial compensation. We deduce that inside debt also enhances hedging possibilities for stock investors through stock selection and portfolio choice.

Keywords: Inside debt, defined benefit pensions, deferred compensation, managerial incentives, abnormal return

JEL Classification: G12, G14, G32, M52

Suggested Citation

Francis, Bill B. and Yilmaz, Gokhan, Inside Debt and Stock Price Performance (August 2013). Available at SSRN: or

Bill B. Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management ( email )

Troy, NY 12180
United States

Gokhan Yilmaz (Contact Author)

University of Minnesota Duluth ( email )

Labovitz School of Business and Economics
1318 Kirby Drive
Duluth, MN 55812
United States

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