Inside Debt and Corporate Investment

Abstract

This paper examines how and when CEO debt-like compensation (i.e., “inside debt”) affects debt contracting terms and corporate investment levels. We find a negative relation between inside debt and both R&D and capital expenditures for firms with low financing constraints, but this relationship reverses for constrained firms. Moreover, we show that this result holds for firms that are financially constrained in their ability to raise debt, but not for firms that are constrained in their ability to issue equity. Our findings contribute to the literature on CEO incentives and corporate investment policy, and provide a richer understanding of the role of debt-like compensation in reducing agency costs.

Keywords: inside debt holdings, deferred compensation, pension, investment efficiency

JEL Classification: G34, J33, M48