Inside Debt and Corporate Failure

56 Pages Posted: 10 Nov 2013 Last revised: 28 Jun 2014

See all articles by Ngoc Giang Hoang

Ngoc Giang Hoang

Utrecht University School of Economics

Date Written: November 7, 2013

Abstract

This paper studies the impact of executive pensions and deferred compensation plans, collectively known as "inside debt'', on corporate failures. I find that, on average, a firm whose CEO holds a larger fraction of the firm's debt than equity (i.e., when the ratio of the CEO's inside debt holdings divided by the firm's debt is larger than the ratio of the CEO's equity holdings divided by the firm's market capitalization) has a hazard rate of failure that is 51% lower than a firm in which this relation is reversed. The evidence also indicates that CEOs with larger incentives provided by inside debt manage their firms more conservatively. Finally, I document that inside debt is associated with higher recovery rates for creditors in bankruptcy. This result is consistent with the hypothesis that inside debt incentivizes managers to preserve firm value in bankruptcy.

Keywords: Inside debt, pension, deferred compensation, corporate failure, bankruptcy

JEL Classification: G31, G32, G33, J32, J33, K22, M52

Suggested Citation

Hoang, Ngoc Giang, Inside Debt and Corporate Failure (November 7, 2013). Available at SSRN: https://ssrn.com/abstract=2351718 or http://dx.doi.org/10.2139/ssrn.2351718

Ngoc Giang Hoang (Contact Author)

Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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