CEO inside debt and downside risk: Evidence from internal and external environments

Chien-Chiang Lee (), Chih-Wei Wang and Yu-Ching Wu

Pacific-Basin Finance Journal, 2023, vol. 80, issue C

Abstract: In this study, we investigate whether inside debt held by CEOs is associated with downside risk and also consider the impact of internal (CEOs' and firms' characteristics) and external (industry competition and macroeconomic uncertainty) factors on the connection to CEO inside debt, which is debt-like compensation and corporate downside risk. We find that CEOs who hold more inside debt reduce downside risk. However, the negative impact of inside debt holdings on downside risk is offset in firms managed by younger or male CEOs, whereas the ability of inside debt held by a CEO to decrease corporate downside risk is amplified in firms operated by overconfident CEOs. Moreover, this reduction effect occurs in firms of good quality (higher earnings, smaller size, lower leverage, higher cash surplus, higher excess returns, and higher profitability). Finally, we find that this effect is more pronounced for firms operating in a low-competition industry, facing low economic policy uncertainty, and low equity market volatility.

Keywords: CEO inside debts; Downside risk; CEOs' characteristics; firms' characteristics; Industry competition; Economic policy uncertainty; Equity market volatility (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:80:y:2023:i:c:s0927538x23001397

DOI: 10.1016/j.pacfin.2023.102073

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