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Journal of Financial Economics Vol. 103 No. 3 2012

Seeking safety: The relation between CEO inside debt holdings and the riskiness of firm investment and financial policies

Cory A. Cassell1; Shawn X. Huang2,1; Juan Manuel Sanchez; Michael D. Stuart1,3

1 University of Arkansas at Fayetteville · 2 Arizona State University · 3 Oklahoma State University

open access

Abstract

CEO inside debt holdings (pension benefits and deferred compensation) are generally unsecured and unfunded liabilities of the firm. Because these characteristics of inside debt expose the CEO to default risk similar to that faced by outside creditors, theory predicts that CEOs with large inside debt holdings will display lower levels of risk-seeking behavior (Jensen and Meckling, 1976). Consistent with the theoretical predictions, we find a negative association between CEO inside debt holdings and the volatility of future firm stock returns, R&D expenditures, and financial leverage, and a positive association between CEO inside debt holdings and the extent of diversification and asset liquidity. Collectively, our results provide empirical evidence suggesting that CEOs with large inside debt holdings prefer investment and financial policies that are less risky.

DOI
10.1016/j.jfineco.2011.10.008
Volume
103
Issue
3
Pages
588-610
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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