Inside Debt and Corporate Investment

37 Pages Posted: 19 Aug 2014 Last revised: 26 Jan 2018

See all articles by Joonil Lee

Joonil Lee

Kyung-Hee University

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Peter Oh

McGill University - Desautels Faculty of Management

Marshall D. Vance

Virginia Tech

Date Written: January 26, 2018

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

Suggested Citation

Lee, Joonil and Murphy, Kevin J. and Oh, Peter and Vance, Marshall D., Inside Debt and Corporate Investment (January 26, 2018). AAA 2015 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=2482857 or http://dx.doi.org/10.2139/ssrn.2482857

Joonil Lee

Kyung-Hee University ( email )

Dongdaemun-ku
Seoul, Gyeonggi-Do 446-701
Korea, Republic of (South Korea)

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

Peter Oh (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Marshall D. Vance

Virginia Tech ( email )

Blacksburg, VA 24061
United States

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