Essays On Ceo Inside Debt
Executive defined benefit pensions and deferred compensation are known as "inside debt". The reason is that their values depend on the ability of the firm to make future payments to its participant employees. Such plans have the potential of mitigating the risk-shifting problem of managers (Jensen and Meckling (1976)) because executives who own inside debt are worried about firm default risk and not only about shareholder return. In this dissertation, I examine the determinants of CEO inside debt and its components. I then use the inside debt as a measure of CEO risk preferences and examine its relation to firms' risk. In Chapter one, I use the new SEC disclosure rule of 2006 to examine the determinants of CEO inside debt. I find that CEOs defer a larger fraction of their compensation when their cash compensation is high, firm liquidity is high, firm default risk is low, and when executive personal wealth is high. These findings are consistent with CEOs choosing to defer compensation when they least need the money and when they do not expect the firm to default. In contrast to previous studies, I find a non-linear inverted U-shape relation between firm leverage and CEO inside debt. In particular, CEOs reduce their inside-debt when the firm is highly levered. Using novel data from executive deferred compensation, Chapter two presents new evidence on the relationship between CEO risk preference and firm risk (the volatility of firm performance measures such as stock return, earnings and operating cash flows). My results show a negative association between the CEO risk aversion (as measured by realized performance on inside debt) and the volatility of firm market performance: Firms with risk-averse CEOs have experience less stock price volatility. I also find that firms providing deferred compensation plans have lower performance volatility. The results contribute to the inside debt literature by showing that debt compensation is related to lower firm risk and lower firm market value. inside
Inside Debt; Managerial Compensation; Capital Structure; Corporate Governance
Ng, David T.
Grinstein, Yaniv; Leary, Mark T
Ph.D. of Agricultural Economics
Doctor of Philosophy
dissertation or thesis