Working Paper Series 2021-11 The effect of CEO bonus-based inside debt holdings on firm risk

研究成果名稱：

Working Paper Series 2021-11 The effect of CEO bonus-based inside debt holdings on firm risk

摘　要：

CEO inside debt holdings, consisting of pension benefits and deferred compensation, are prevalent and significant in CEO compensation. Unsecured and unfunded CEO inside debt holdings force CEOs to bear default risk similar to that faced by outside creditors and align the incentives of CEOs with those of outside creditors. Empirical research confirms this, finding a negative association between CEO inside debt holdings and the volatility of firm stock returns and a negative association between CEO inside debt holdings and the default risk. However, it is also important to understand the incentive effects of bonus plans on inside debt holdings because CEO pension benefits often are dependent on bonus plans, which induce executives to seek risk. In this paper, after considering the composition of inside debt in which pension benefits are contingent on bonus plans, we find that the negative associations mentioned above are weakened. Overall, our evidence suggests that CEOs with bonus-based inside debt holdings choose less conservative corporate policies than those without bonus-based inside debt holdings.