CEO Inside Debt and Mutual Fund Investment Decisions

45 Pages Posted: 28 Oct 2019 Last revised: 1 May 2021

See all articles by Arash Dayani

Arash Dayani

Clemson University, Department of Finance

Date Written: June 22, 2019

Abstract

I show equity mutual funds invest less in companies with higher inside debt, whereas corporate
bond funds invest more in such companies. The e ffect persists after accounting for endogeneity
using fi rst-time mandatory disclosure of inside debt in 2007 as a natural experiment, and using
state-level personal income tax rates as an instrument for inside debt. The e ffect of inside debt on
portfolio allocation is stronger in fi rms with higher likelihood of default and higher idiosyncratic
risk, fi rms su ffering from debt overhang, and fi rms with lower credit ratings. Lastly, equity funds
that underweight high-inside debt fi rms and bond funds that overweight them deliver positive
alphas.

Keywords: Inside Debt, Mutual Funds, CEO Compensation

JEL Classification: G23, G32, G33

Suggested Citation

Dayani, Arash, CEO Inside Debt and Mutual Fund Investment Decisions (June 22, 2019). Available at SSRN: https://ssrn.com/abstract=3470303 or http://dx.doi.org/10.2139/ssrn.3470303

Arash Dayani (Contact Author)

Clemson University, Department of Finance ( email )

Clemson, SC 29634
United States

HOME PAGE: http://www.arashdayani.com

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