CEO's Inside Debt and Dynamics of Capital Structure

Brisker, Eric R.; Wang, Wei

doi:10.1111/fima.12169

Cited by 40 publications

(13 citation statements)

References 66 publications

(214 reference statements)

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“…Cassell et al (2012) find that CEO inside debt is negatively associated with R&D investments and book leverage. Brisker and Wang (2016) find that higher inside debt ratios are negatively associated with firm leverage (debt ratios). In order to see how market competition impacts the relation between inside debt and firm investment and financial policies, I use R&D to assets and firm book leverage (total debt/assets) as dependent variables.…”

Section: Resultsmentioning

confidence: 99%

CEO inside debt, market competition and corporate risk taking

Sheikh¹

2019

IJMF

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Purpose The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking. Design/methodology/approach Ordinary least squares regressions are used to estimate the relation between CEO inside debt and firm risk. Additionally, instrumental variable (IV-GMM) regressions are used to check the robustness of the results. Findings The results of this paper indicate that CEO inside debt is negatively associated with the measures of future risk. However, this negative association is influenced by market competition. Specifically, CEO inside debt results in lower levels of firm risk when market competition is high. When market competition is low, inside debt has no effect on firm risk. Additional results show that CEOs with large inside debt tend to decrease R&D investments and financial leverage and increase firm cash holdings and working capital only when market competition is high. Overall, these results suggest that market competition significantly influences the effect of CEO inside debt on corporate risk-taking by changing the strength of incentives from inside debt. Practical implications CEO inside debt could be used to provide incentives to CEOs to manage corporate risk-taking. Social implications The empirical results in this paper provide a practical tool to the boards of corporations to manage corporate risk-taking. The results suggest that boards can reduce excessive risk-taking by increasing the level of debt type compensation incentives. However, this strategy is effective only when market competition is high because in such markets inside debt provides the strongest incentives to reduce corporate risk. When competition is low, incentives from inside debt are ineffective in managing corporate risk-taking. Originality/value This is the first study that shows that the negative association between CEO inside debt and corporate risk-taking critically depends on the intensity of market competition.

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Section: Resultsmentioning

confidence: 99%

CEO inside debt, market competition and corporate risk taking

Sheikh¹

2019

IJMF

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“…This research find empirical support for the notion that CEOs with large compensation leverage actively manage the firm's assets in order to reduce the firm's overall financial risk. Brisker and Wang (2017) find that higher CEO inside debt is correlated with lower firm leverage and faster leverage adjustments. Anantharaman et al (2013) use a smaller sample of pension data (2006)(2007)(2008) from Execucomp, and observe that managers with higher compensation leverage obtain outside debt at a lower cost, with less restrictive debt covenants.…”

Section: Introductionmentioning

confidence: 84%

Executive pensions, compensation leverage, and firm risk

White

2018

IJMF

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Purpose The purpose of this paper is to investigate how the structure of both CEO and non-CEO executive compensation affects the overall risk of a firm. The author focuses on the interplay between CEO and non-CEO executive compensation structure. Design/methodology/approach The author uses a hand-collected pension-database that employs both OLS and two-stage least squares regressions to determine the effects of inside debt on default risk using the distance-to-default framework. The database consists of 8,965 executive-year data points from 272 firms. Findings This paper accomplishes three major objectives: first, the author presents a significant extension of Sundaram and Yermack (2007) by including non-CEO executives; the author demonstrates how the differences in inside debt between CEO and non-CEO executives are directly related to firm risk; and that funding these pensions via a Rabbi Trust eliminates most of the risk-shifting effects. Firms with the lowest compensation leverage gap between CEO and non-CEO executives were most likely to observe the agency costs associated with high executive leverage. When compensation leverage structures were substantially different, or the pension was pre-funded, these effects are neutralized. Originality/value To the best of the author’s knowledge, the first paper addresses the effects of Rabbi Trusts on risk-shifting behavior between both CEOs and non-CEO executives. Further, the author extends Sundaram and Yermack (2007) using a hand-collected database six times larger than the original paper. By focusing on the “leverage gap” between CEOs and non-CEO executives, the author presents unique evidence that underlines the risk dynamics between CEOs and their boards.

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“…Only one model has both CEO RDE > 1 and Leverage > 1 as significant, but the magnitude, direction and significance are the same for both. For a more detailed piece concerning the negative association between inside debt and firm leverage, see Brisker and Wang (2017).…”

Section: Empirical Findings and Discussionmentioning

confidence: 99%

CEO inside debt and firm debt

Beavers

2018

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Purpose This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm. Design/methodology/approach Using S&P 1500 data from CRSP, Compustat, Execucomp and Capital IQ between 2006 and 2011, statistical analysis and regression models are used to determine potential correlations between the variable of interest, inside debt and debt control variables, including specialization. Findings Firms with high inside debt specialize in commercial loans and drawn credit lines. Larger firms diversify their debt holdings among commercial instruments and senior bonds. As firm size increases with inside debt, the effects are counteracted. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt. Research limitations/implications Debt diversification is partially affected by compensation in the form of inside debt. Future studies of debt diversification should include CEO compensation controls. Practical implications For struggling companies or for those that want to return to a conservative financial policy, they can influence the CEO to make this decision by deferring his compensation to retirement. Originality/value This paper considers debt policy through the lens of a key decision maker, the CEO, and uses compensation as an incentive to determine what choices are made concerning debt.

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CEO's Inside Debt and Dynamics of Capital Structure

Cited by 40 publications

References 66 publications

CEO inside debt, market competition and corporate risk taking

CEO inside debt, market competition and corporate risk taking

Executive pensions, compensation leverage, and firm risk

CEO inside debt and firm debt

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