Inside Debt and Corporate Investment
37 Pages Posted: 19 Aug 2014 Last revised: 26 Jan 2018
Date Written: January 26, 2018
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
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